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

By :: April 19th, 2012

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.     

 

7Comments

  1. AMTbuff  ::  1:47 pm on April 19th, 2012:

    For anyone paying AMT or close to it, failure to renew the already lapsed AMT exemption would increase tax liability by a staggering $8000 on a joint return. This would hit couples with incomes well under $200,000.

    Like Howard, I expect the current AMT exemption to be renewed without any serious attempt to find real revenue to replace the fantasy revenue that was counted in the current law baseline.

  2. Michael Bindner  ::  2:38 pm on April 19th, 2012:

    Only people with average income pay the average, and all payments come over a 52 week period. The lowest quintile average is about $10 per week. The second quintile pays about $25 per week, with the middle quintile paying about $37 weekly. No one will be losing their homes over such amounts and the likelihood is that there has been a behavioral effect on employers going along with the most recent making work pay and payroll tax cuts. If the government is giving your employees a raise, there is no need to do so yourself. I suspect that if we, as a nation, bite the bullet and let the tax cuts expire, employer will increase wages to keep employees happy.

    The top 1% and especially the top 0.1% will take a bigger hit, depending, of course, on whether an inheritance is included in their income. Some families will take a tremendous tax hit if Clintonian death taxes come back in full force. They have much less to lose than the cost of taking lunch to work a few days a week or a second dinner out. A willingness to throw everyone under the bus for a little money will have the 400 wealthy families subsidizing Grover Norquist’s crusade to drown government in a bathtub rethink their opposition to compromise (especially if they own one of those restaurants people go to at lunch). For me, its a no brainer to at least give the impression that the 2001/2003/2010 cuts will be allowed to expire.

  3. Michael Bindner  ::  2:39 pm on April 19th, 2012:

    Tax reform is essentially abolishing the tax code and replacing it with a lower cost AMT.

  4. Ralph H  ::  8:50 am on April 20th, 2012:

    Even the current AMT is awful — not fixing it would be worse.

    So why did the geniuses choose to have buth the Bush and Obama tax cuts expire at the same time? Oh yes it patches us through another election.

  5. Adam Boatsman  ::  6:37 am on April 23rd, 2012:

    Thanks for the post Howard. I agree that the hardest hit – as some earlier comments have posted, are going to be those folks below (and above) AMT. I often wonder why we can’t take a program at a time approach – maybe a year at a time?

  6. Tax Roundup, 4/24/2012 « Roth & Company, P.C  ::  9:27 am on April 24th, 2012:

    […] Gleckman at TaxVox: Letting the Bush/Obama Tax Cuts Expire Would Raise Average Taxes by $3,000.  ”It would, that is, if the economy didn’t […]

  7. Colin Longabaugh  ::  1:22 pm on January 11th, 2013:

    alexdombroff@alexanderdombroff.com