The impact would vary significantly by income level, the study found, ranging from a $412 jump for the lowest earners (a reduction of 3.7 percent in after-tax income) to $120,000 for the top 1 percent (a 10.5 percent bite). Middle-income households — those earning between $40,000 and $65,000 a year — would see their taxes go up by an average of $2,000, the study found, leaving those families with 4.4 percent less money to spend.
For most taxpayers, the bulk of the increase would be triggered by the expiration of tax cuts enacted in 2001 and 2003 during the George W. Bush administration. The expiration of President Obama’s payroll tax holiday, which shaved two percentage points off the 6.2 percent Social Security tax, comes in a close second.
But the lowest earners would be hit hardest by the expiration of tax breaks enacted as part of Obama’s 2009 economic stimulus package, the study found. The stimulus includes a temporary expansion of the earned income tax credit and the child tax credit for working families. And it temporarily bumps up a two-year, $1,800 tax credit for college tuition to four years and $2,500.
“The fiscal cliff turns out to be quite complicated,” said Donald Marron, director of the Tax Policy Center, the result of “an accumulating snowball of temporary tax provisions.”
“There are a lot of different pieces in there,” he said.
The “fiscal cliff” is a term coined by Federal Reserve Chairman Ben S. Bernanke. It refers to a collection of changes in current law that are all set to strike in January, triggering the sharpest reduction in the federal budget deficit in more than 40 years.
Most of the changes involve higher taxes, and some use the scarier moniker “taxmageddon.” In addition to an array of expiring policies that benefit individuals and corporations, new taxes enacted as part of Obama’s health-care initiative are set to take effect for the first time at the beginning of 2013, including a 3.8 percent tax on capital gains for high-income households.
The fiscal cliff also includes $110 billion in spending cuts scheduled to be sliced from the budgets of the Pentagon and other federal agencies next year. The report by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, examines only the tax changes.
Both parties prefer to reduce the size of the fiscal cliff. But with Congress and the White House heading into the final phase of the election campaign, policymakers have been unable to chart a path forward. Republicans want to extend all the expiring tax breaks; Obama and other Democrats want to let the Bush tax cuts expire on income over $250,000 a year.
The Tax Policy Center report, titled “Toppling Off the Fiscal Cliff: Whose Taxes Will Rise and How Much?,” emphasizes that the fiscal cliff is not monolithic. Even as policymakers bicker over the Bush tax cuts, they could agree to extend other policies. The report identifies nine categories of tax increases, each with its own set of political considerations.
Researchers concluded that the payroll tax holiday will almost certainly be allowed to expire, lowering the average worker’s paycheck by about $80 a month. But they also forecast that Congress will act to prevent the alternative minimum tax from affecting an additional 20 million families in April. Households making between $65,000 and $500,000 would take the hardest hit.
“That’s something that’s unlikely for Congress to want to embrace,” Marron said.