Huge tax increase looms at year-end 'fiscal cliff'

Published: Monday, Oct. 1, 2012 4:02 p.m. CDT

WASHINGTON (AP) — A typical middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year if lawmakers fail to renew a lengthy roster of tax cuts set to expire at the end of the year, according to a new report Monday

Taxpayers across the income spectrum would be hit with large tax hikes, the Tax Policy Center said in its study, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.

All told, the government would reap more than $500 billion in new revenue if a full menu of tax cuts were allowed to expire. The expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children, among others. Also expiring is a 2 percentage point temporary payroll tax cut championed by President Barack Obama.

"It's just a huge, huge number," said Eric Toder, one of the authors of the study.

Economists warn that the looming tax hikes, combined with $109 billion in automatic spending cuts scheduled to take effect in January, could throw the fragile economy back into recession if Washington doesn't act. The automatic spending cuts are coming due because of the failure of last year's deficit "supercommittee" to strike a bargain. The combination of the sharp tax hikes and spending cuts has been dubbed a "fiscal cliff."

"The fiscal cliff threatens an unprecedented tax increase at year end," says the report. "Taxes would rise by more than $500 billion in 2013 — an average of almost $3,500 per household — as almost every tax cuts enacted since 2001 would expire."

Cumulatively, the country would see a 5 percentage point jump in its average tax rate, which works out to taxes on the top 1 percent jumping by more than 7 percentage points and about 4 percentage points for most people earning below $100,000 a year.

Put another way, people in the $40,000-$64,000 income range would see their average federal tax rate jump from 14 percent to 17.8 percent — or an increase in their overall federal bill of 27 percent.

All told, almost 90 percent of all households would face a tax increase, though the top 20 percent of earners would bear 60 percent of the overall cost.

It's likely that Washington policymakers will allow the payroll tax cut first enacted for 2011 to expire, and Obama is calling for permitting rates on individual income exceeding $200,000 and family incoming over $250,000 to go back to Clinton-era rates of as much as 39.6 percent.

Republicans controlling the House have also called for the expiration of Obama-backed tax cuts for the working poor, including expansions of the earned income and child tax credits.

But all sides are calling for the renewal of Bush-era tax rates for everyone else. Without a renewal of those rates, a married couple would pay a 28 percent rate on taxable income exceeding $72,300 instead of the 25 percent rate they now pay. And the 10 percent rate paid on the first $8,900 of income would jump to 15 percent.

The new top rate of 39.6 percent would kick in for income over $397,000. The current top rate is 35 percent rate.

The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.

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