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Absent intervention from Congress, the United States is facing the largest tax hike in history on January 1, 2013. Known as “Taxmageddon” or the coming “Fiscal Cliff,” taxpayers will be hit with a $500 billion tax hike that year alone. This includes the sunset of the tax relief provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation of 2003, expiration of the Payroll Tax Holiday, the Alternative Minimum Tax (AMT) patch and dozens of business extenders.
In addition, the second wave of tax hikes in the Patient Protection and Affordable Care Act (PPACA) comes into play on January 1. The expiration of the tax provisions, coupled with the PPACA tax hikes, would bring revenues well above their historical averages, to 20 percent of GDP.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) are commonly referred to as the “Bush Tax Cuts,” although they were also extended in 2010 by President Obama. While both bills made significant changes to tax law, they are unique in that the changes were slated to take effect for only ten years. This allowed the Senate to pass the tax relief with only a simple majority, rather than the customary 60 votes. However, the current Congress now must grapple with what to do when the laws are scheduled to sunset at the end of 2012.
The Bush Administration implemented a series of tax cuts and relief programs through EGTRRA to spur economic growth and job creation following the 2000 recession. The goal of the tax relief was to reduce burdens on individuals; however, the tax cuts were not targeted nor phased in quickly enough to maximize their economic impact. By the end of 2002 the economy had lost 540,000 jobs and shed an additional 287,000 by the first quarter of 2003.28 Congress passed and President Bush quickly signed JGTRRA in May 2003 to spur jobs and growth. This second tax relief plan accelerated the 2001 tax cuts, making most of them effective immediately. Most importantly, JGTRRA reduced the top capital gains and dividends tax rates to 15 percent. As a result, the third quarter after JGTRRA was implemented the economy grew at an astonishing rate of 7.5 percent. Additionally, in the fourth quarter payroll employment grew by 311,000 jobs.
Originally scheduled to sunset in December 2010, the Obama Administration extended the tax cuts until December 31, 2012. With the sunset of the tax cuts the following changes will take place on January 1.
Personal income tax rates will increase:
|Bracket Tax Rate||2013 Rate|
In addition to the income tax rates rising there will be a phase-out of itemized deductions as well as personal exemptions:
|Child Tax Credit||$100||$500|
There will also be a slew of higher tax rates for savers and investors:
The Heritage Foundation notes that expiration of the Bush Tax Cuts alone will make up 34 percent, or $170 billion, of the $500 billion Taxmageddon tax hike. Over ten years, the Congressional Budget Office (CBO) shows the tax hike on families amounts to $2.6 trillion.
The payroll tax provision was a temporary tax cut put in place in 2010. It reduced payroll taxes from 6.2 percent to 4.2 percent, allowing someone making $50,000 to keep an additional $1,000 of that salary in their bank account.
On January 1, 2013 Americans will see their payroll taxes rise once again. The expiration of the tax holiday is said to account for 25 percent, or $125 billion, of all Taxmageddon revenues.
The AMT was created by the Democratic Party under President Johnson to ensure that high earners benefiting from certain tax advantages still maintained some income tax liability. However, over time, the AMT began to ensnare more families as income rose.
In December 2007, Congress passed a patch to the Alternative Minimum Tax (AMT), relieving 23 million Americans from paying the AMT. Originally, the AMT patch provided taxpayers with relief for one year, raising the income threshold in which families qualified. The patch was later extended until December 31, 2012. Today, the AMT hits 4 million people. With the expiration of the patch in Taxmageddon, the tax created to hit “the rich” will extend to 31 million families.
The combinations of the temporary taxes expiring—the Bush Tax Cuts, Payroll Tax Holiday and the AMT Patch—are frightening enough; but that’s not the end of the tax hikes. This January the second wave of Obamacare tax hikes will hit Americans, and businesses will see their taxes increase when more employer tax hikes take effect.
Obamacare tax increases raise $502 billion in revenue over a ten-year span. This coming year, Americans will see their Medicare Payroll taxes increase, caps placed on Federal Spending Accounts(FSA), a new Medical Device Tax and a “haircut” for medical itemized deductions.
|Medical Device||No Excise Tax||2.3% Excise|
|"Haircut"||7.5% of AGI||10% of AGI|
|FSA||No cap||$2500 cap|
“Business extenders” refer to a handful of temporary deductions and credits devised as a response to America’s proscriptive tax treatment of business and entrepreneurship. Like permanent deductions and exemptions, they should not exist in a broad-base, low-rate tax code.
However, these business deductions and credits are a response to the disadvantage American employers face with the highest corporate tax rate in the developed world. Getting rid of them is a good idea, but only in the context of fundamental tax reform that is revenue-neutral and lowers marginal tax rates. Piecemeal elimination, without offsetting the increased in revenues, serves to harm businesses and employers struggling to stay competitive in today’s economy.
Some of the changes taking place on January 1 are:
|Research and Experimentation||Tax Credit||Eliminated|
|IRA charitable contributions||Permitted||Not permitted|
|Tuition and Fees||Deducation||No deduction|
|Coverdale Education Savings Account||$2000||$500 Cap|
No household making more than $1 million each year should pay a smaller share of their income in taxes than a middle class family pays,” says the Obama Administration. The White House claims that 22,000 households had an income above $1 million in 2009 and paid less than 15 percent of their income in taxes. In addition to the 22,000 that paid 15 percent, it is stated that 1,470 households paid no federal income taxes.
The Obama Administration takes this as an example of how the U.S. tax system is unfair, an argument that has crystalized in 2012 over what has come to be known as the “Buffett Rule.” The Rule is named after well-known millionaire Warren Buffett who claimed publicly that he pays fewer taxes than his secretary. Similar to the AMT, the Buffett Rule would set a flat minimum income tax of 30 percent on all income for top earners. Obama and some Members of Congress support this rule, alleging that it ensures every American pays their “fair share” in taxes.
However, looking solely at income taxes doesn’t show the whole picture. High earners are subjected to corporate income tax as well as dividend and capital gains taxes. At the end of the day, Warren Buffett and other top earners pay more than any other tax bracket. Even the President’s own economic advisors note that the top one percent pay twice as much as the middle 20 percent. In 2012, top earners are expected to pay an average of 29.6 percent in income, payroll and corporate taxes, while the middle 20 percent of America paid 13.3 percent in income, payroll and corporate taxes.
America already has a steeply progressive tax code. The top 1 percent of earners pay 40 percent of all income taxes and 28 percent of all federal combined taxes. The lower half of all income earners, those making less than $33,000, pay 3 percent of all income taxes and less than 1 percent of all combined federal taxes.
The Buffett Rule, like the AMT, isn’t just a tax on high income earners but also on small businesses. Most small and mid-size businesses are organized as S-corporations, LLCs, partnership, or sole proprietors whose taxes are assessed through their profits on personal tax returns. Further, the majority of small and mid-size employer profits face taxation at the top marginal income tax rate. Thus, businesses’ profits, capital gains and dividends will now be subjected to the Buffett Rule.
The Administration’s focus on the “Buffett Rule” demonstrates how it is a political tool rather than a serious fiscal solution. The Joint Committee on Tax estimates a version of the Buffett Rule would raise $31 billion over the next ten years, which is less than one-tenth of one percent of all revenue expected to be collected during that time. What is more appropriate, for those Warren Buffetts in the world, is the idea of a “Buffett Line.” The Buffett Line would simply add an extra line to the 1040 tax form that would allow taxpayers to write-in a voluntary donation to Treasury for debt reduction. With a Buffett Line, Warren Buffett and others who feel “the rich” should pay more for the government’s overspending problem could rest easy without penalizing small businesses and families for their “patriotic” guilt.
Federal Reserve Chairman Ben Bernanke recently compared Taxmageddon to a “massive fiscal cliff.”38 While Congress decrees that the 2001 and 2003 Tax Cuts created relief for the wealthy, middle income Americans will experience a reinstatement of the death tax and increases in their income taxes. Outside of the Bush Tax cuts, middle income families face an increase in their payroll taxes, the possibility of paying the AMT, and a limit on tax credits such as educational tax credits.
Despite lawmakers’ platitudes to “deficit reduction” as a justification for tax hikes, history shows that any new revenues will be used to fuel more spending, not to reduce debt.
These tax increases hurt the economy, employment and wages of Americans. Overall, we can expect that the federal government will increase its spending per household from $30,015 this year to $34,602 next year.39 After serious efforts to cut spending were undertaken this year, Americans were granted a slightly earlier COGD in 2012. If Taxmageddon is allowed to hit, taxpayers will likely see a permanent shift to increasingly later Cost of Government Days in 2013 and beyond.
After the $500 billion (minimum) Taxmageddon windfall, we anticipate that COGD for 2013 will have an additional 11.67 days added. This could make 2013’s COGD the latest yet.
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- About the Author/The Thomas Jefferson Fellowship
- A Message from Grover Norquist and COGC Executive Director Mattie Duppler
- Overview of Results
- Cost of Government Day Components
- State by State Breakdown
- The Government Spending Burden
- State Tax Increases
- Government Employees
- The Regulatory Burden
- Interstate Migration
- The Debt Ceiling and Budget Control Act of 2011
- The Corporate Income Tax in the United States
- Abundance of Supply: America's Energy Resources