Email
The Tax Policy Center Report
The full 25 page Tax Policy Report is available on the internet at:
http://www.taxpolicycenter.org/publications/url.cfm?ID=412666
In the summary below, we have extracted what we feel are the most important aspects of the report, for your consideration.
All of the financial metrics that follow are quoted from the report, not from any independent calculation on our part.
The Fiscal Cliff
The so-called fiscal cliff consists of the expiration of a number of legislative acts, ane the introduction of new taxes, including:
- Bush Era Tax Cuts - the Economic Growth and Tax Relief Reconciliation Act of 2011 and the Jobs and Growth Tax Relief Reconciliation Act of 2003
- Obama Era Tax Cuts – the American Recovery and Reinvestment Act of 2009
- Estate Tax Cuts - Part of the EGTRRA, but analyzed separately by the Tax Policy Center
- Expiration of Alternative Minimum Tax Increase, also part of the EGTRRA
- Payroll Tax Cut - the cutting of the Social Security payroll tax from 6.2% to 4.2% in 2011
- New Taxes created by the 2010 Health Care Legislation
- Extenders – a variety of short tax provisions enacted individually – these are analyzed as a group by the Tax Policy Center and include such things as accelerated or bonus depreciation for businesses and work opportunity tax credits. (In this summary, we will ignore summarizing these, as they are numerous, but individually small in impact) All of these various items either expire or become law on January 2, 2013.
The Financial Impact
If all of the expiring acts were allowed to expire without action, or become law without action, the Tax Policy Center calculated that the following financial impact would occur:
- Total tax liability would increase by $536 billion in 2013 – this is a 21% increase over current levels
- The average income tax burden per household increases by an average of $3,500
- Taxpayers in the highest quintile (top 20%) would see tax increases of $14,000, with an percentage increase of tax bracket of 5.8 points (580 basis points)
- Taxpayers in the lowest quintile (bottom 20%) would see taxes increase by an average of $412, with a percentage increase in tax bracket of 3.7 points (370 basis points)
- Taxpayers in the top 1% of income would see total taxes increase by $120,000 with a percentage increase in tax bracket of 7.2 points (720 basis points)
These total tax impact listed above assumes that no legislative action occurs. Therefore, the tax increases shown above include both the expiration of the payroll tax cut and the expiration of the Bush Tax cuts.
The report does go into great detailing showing analysis of the tax impact of each individual component of the fiscal cliff, particularly in the appendix tables. In our summary, we are listing only those items we think of are most interest or importance, but if you need deeper drill-down into the impact of each individual component of the fiscal cliff, they can be found in the full report.
Quintile Boundaries
The impact of the fiscal cliff tax changes are all presented in terms of the various quintiles (20% groupings) of citizens based upon cash income (which is different from adjusted gross income, AGI, used in analyses done by the Tax Foundation).
Unfortunately, the Tax Policy Center report does not specifically call out the actual income defining the boundaries of each quintile. Such boundaries may have been previously published by the Tax Policy Center, but they are not listed in this particular report.
The most recent data published by the Tax Foundation, using 2009 tax data, lists the top 10% boundary as an income of $112,000. The top 25% boundary is an income of $66,000. The 50% boundary is an income $32,396.
We can therefore estimate, for “back of envelope” thinking, the top quintile as being defined by an income of about $75,000 to $80,000.
The top 1% of taxpayers is an income greater than $344,000 according to 2009 data.
For more on the distribution of taxes paid and the income levels of the 10%, 25%, and 50% boundaries, please see:
http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0
Total Components of the Fiscal Cliff
The first breakdown of the total impact is to list the impact of each individual component of the fiscal cliff, as shown in the following table.
| Element Of The Fiscal Cliff | Billions, $ | Percentage of Total Fiscal Cliff |
|---|---|---|
Payroll tax |
115 |
22% |
Health Care Law |
24 |
5% |
High Income Capital Gains and Dividends |
8 |
2% |
High Income Rates, Pease, and PEP |
44 |
8% |
Stimulus Legislation Tax Credits |
27 |
5% |
Extenders |
75 |
14% |
Estate Tax |
31 |
6% |
All other Bush Tax Cuts - Income Tax Brackets |
171 |
32% |
Alternative Minimum Tax Patch |
40 |
8% |
| Totals | 536% | 100 |
The ordering of the elements in this table represent the Tax Policy Center’s subjective judgment on the likelihood of legislative action. Those at the top of the list represent elements where no legislative action is likely; those at the bottom of the list represent elements where some type of legislative action is likely.
Note that all of the calculations were made using the assumption that no legislative action is taken on any of these components.
The actual impact of each element on the total fiscal cliff is likely to be dependent in size on action taken on other elements. The Tax Policy Center makes no accounting for this dependency, however.
In addition, the Tax Policy Center made no adjustment for the alteration of taxpayer behavior by changes in the tax laws, but this is stated in the report. For example an enactment of changes in capital gains rates that occurs in 2014 might cause higher sales in 2013 than might otherwise occur.
Nevertheless, the estimates serve to provide some scale on the relative importance of each element of the fiscal cliff.
The Bush Tax Cuts
The following table copied from the Tax Policy Center report summarizes how the income tax brackets would be changed, if no action is taken on the Bush tax cut expiration. We have chosen to show only the Married Filing Jointly table, although the report also shows table for Single and Head of Household filers.
| Income, Over | Income Under | Current Tax Rate | Bracket Rate, if Cuts Expire |
|---|---|---|---|
$0 |
$17,800 |
10% |
15% |
$17,800 |
$60,350 |
15% |
15% |
$60,350 |
$72,300 |
15% |
28% |
$72,300 |
$145,900 |
25% |
28% |
$145,900 |
$222,300 |
28% |
31% |
$222,300 |
$397,000 |
33% |
36% |
$397,000 |
and up |
35% |
40% |
Again, the table above assumes no legislative action is taken.
Income Tax Increases
The report also calculates the approximate increase in income tax that would occur for each of the quintiles. In the table below, we have highlighted the impact of each of the various component pieces of the Bush income tax cuts, which the Tax Policy Center analyzed individually. If the Bush tax cuts are allowed to expire, then the total of each of these rows would be the impact for those quintiles.
Income Group |
Average Income Tax Increase |
Average Capital Gains/Dividends Increase |
Average increase for 2001 High Income Cuts |
|---|---|---|---|
Lowest Quintile |
$53 |
$0 |
$0 |
Second Quintile |
$558 |
$0 |
$0 |
Middle Quintile |
$888 |
$0 |
$0 |
Fourth Quintile |
$1,453 |
$0 |
$0 |
Fifth Quintile |
$3,841 |
$996 |
$2,282 |
Top 1% |
$6,546 |
$19,198 |
$45,002 |
We estimate that the boundary for the fourth quintile would be about $45,000 and the boundary for the top quintile to be about $75,000. The top 1% boundary is $344,000. The 50% boundary (the middle of the middle quintile) is $32,000).
The Alternative Minimum Tax
The Bush Tax cuts altered the way in which the alternative minimum tax is applied.
The expiration of this “patch” would cause the current income level application of $74,450 to revert to the pre-Bush tax cut level of $45,000. This would impact “tens of millions” of taxpayers.
The Estate Tax
The estate tax will rise from a top tax rate of 35% with an exemption level of $5 million to the pre-2001 levels of 55% with an exemption level of $1 million.
In addition, surviving spouses would no longer be allowed to claim any exemption not used by their deceased spouse and add it to their own exemption level.
The Tax Policy Center feels that some alteration of the estate tax rules are likely, but does not offer a prediction of what new rules might be enacted.
The Obama Tax Cuts
The Obama Tax Cuts are generally tax credits that were passed as part of the 2009 American Recovery and Reinvestment Act, commonly call the Stimulus bill.
These credits are aimed at lower income taxpayers. The bottom 40% of taxpayers represent 66% of the tax credits enabled under this bill. This is somewhere around the $25,000 income level. (The 50% level is $32,000 AGI).
The expiration of these tax cuts would raise the tax rate of the bottom quintile by 2.5 points, to a level of 3.5 percent. For the second quintile, the tax rate would rise 0.6% to a total tax rate of 9.9%.
Both of the above calculations also assume the expiration of the payroll tax cut, but no other impact from other aspects of the fiscal cliff.
The expiration of these tax credits and cuts have minimal impact on higher income taxpayers.
The Payroll Tax Cut
The payroll tax cut is the one element of the fiscal cliff that the Tax Policy Center states is most likely to be allowed to expire.
This is the cutting of the payroll tax from 6.2% to 4.2%. The proceeds from this tax fund the Social Security system.
Ironically, this tax is the least progressive of all federal taxes, as it is a flat tax paid by all workers, but ceases to be applied on incomes above $110,000 (2011 level).
Nevertheless, the Tax Policy Center, and most other pundits, expect this tax cut to expire as planned in 2013.
Conclusions
This report by the bi-partisan Tax Policy Center is useful for gauging the relative impact and importance of each of the elements of the fiscal cliff.
As we noted in the Ahead of the Curve of last week, however, the more significant fiscal issue is the rapidly approaching statutory debt limit, which we calculated will be reached by the middle of January in 2013, right about the time that the next president is inaugurated.
That means immediate action of some kind will be required in order to avoid default by the US on debt payments.
Whether that action will include action on altering the elements of the fiscal cliff is unclear, although an attempt on both sides is likely to be made.
However, such an attempt was also made in August 2011 by the debt super-committee, which was unable to find common negotiated ground, the result of which is the upcoming sequestration of mandatory spending.
The combination of the fiscal cliff and the approaching debt ceiling limit will make January of 2013 a historic month, no matter who is elected in November.
Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com
