Letting the Bush/Obama Tax Cuts Expire Would Raise Average Taxes by $3,000

It has sometimes been said, even by me, that the easiest way for Congress and the White House to fix the deficit is to do… nothing. Allow the 2001/2003/2010 tax cuts to expire as scheduled in eight months, let the automatic spending cuts enacted in 2011 kick in as planned and, voila, the short-term fiscal problem is pretty much resolved.

There, however, one small problem: Such policy by paralysis would likely wreck a still-fragile economy. A new analysis by my Tax Policy Center colleague Dan Baneman finds that letting the Bush/Obama tax cuts (including the payroll tax cut) fall off the cliff would increase taxes on an average American household by $3,000 in 2013 alone. That’s a steep 5 percent cut in after-tax incomes.

Eighty-three percent would see their taxes rise, and among those making about $60,000 or more, just about everyone would face a tax hike. Those making between $50,000 and $75,000 would pay about $2,200 more, while those making more than $1 million would pay $175,000 more. The top 0.1 percent, whose income averages nearly $7 million, would pay a whopping $480,000 more.

On top of massive spending cuts, this year-end train wreck would result in a deeply austere budget.  Taxes would increase by 2.5 percent of Gross Domestic Product in a single year, the Congressional Budget Office estimates. Nominal spending would fall for the first time since 1955. With interest rates already close to zero, the Federal Reserve could do little to offset this fiscal austerity.

The deficit would fall, all right. The Congressional Budget Office figures the deficit would decline from 7 percent of GDP this year to 3.7 percent in 2013 and to a very manageable 1.5 percent by 2015.  

It would, that is, if the economy didn’t collapse.

There are, of course, two solutions to this looming crisis. The first, and most sensible, would be for Congress and the president to gradually reduce spending growth and slowly raise revenues through tax reform. The second, and most likely, would be for Congress to extend the current tax rules for yet another year and delay those automatic spending cuts.

What Congress is least likely to do, however, is raise taxes by an average of $3,000 next year. You can take that to the bank.