Congress Kicks the Fiscal Can off the Front Stoop

By :: January 1st, 2013

In the end, it looks like Congress isn’t even going to kick the fiscal can down the road. Assuming the House passes the deal agreed to by the Senate on New Year’s Eve, lawmakers will barely get that battered tin container it off the front stoop.

The agreement preserves nearly all of the 2001-2010 tax cuts (with a few key exceptions) and delays most scheduled automatic spending reductions for two months. In effect, for all of the recent over-the-top budget drama, the deal preserves the unsustainable fiscal status quo, which is to say Congress will continue to spend far more than it is willing to collect in taxes.

DentedCanWorst of all, it sets up yet another fiscal crisis in just a few months when, in short order, the federal government reaches its legal borrowing limit and yet another temporary measure keeping government agencies operating expires.

The fiscal cliff deal permanently extends nearly all the tax cuts enacted from 2001 to 2010. One key provision makes permanent the Alternative Minimum Tax “patch” that until now has been extended only one year at a time. That patch would keep about 28 million households off the AMT in 2013 alone. The deal extends for five years some refundable tax credits that were intended as temporary stimulus in 2009 and 2010.

There are a few exceptions to this largess. Individuals with taxable income of $400,000 and couples making $450,000 or more will again pay the Clinton-era top rate of 39.6 percent on ordinary income. They’ll also pay a 20 percent rate on capital gains and dividends, up from 15 percent. On top of that, high-income households will pay another 3.8 percent tax on investment income starting this year under the 2010 health reform law.

Individuals making $250,000-plus and couples making $300,000 or more will also once again face limits on their personal exemptions (PEP) and itemized deductions (Pease). Finally, all workers will lose the temporary 2 percentage point payroll tax cut that was first enacted as part of the 2010 stimulus.

The Tax Policy Center estimates the fiscal cliff deal would raise income taxes by an average of about $364, but nearly all of it would be paid by households in the top 0.7 percent of income. About three-quarters of those making $500,000 to $1 million would pay an average of about $10,000 more in 2013. About 98 percent of those making $1 million or more would pay higher taxes. And their tax bill would go up by an average of about $125,000.

These estimates are relative to what people would pay under 2012 tax rules (the current policy baseline). However, they exclude the lost payroll tax cut which would add an average of about another $740 to every worker’s 2013 tax bill.

Of course, the picture is very different if you compare it to what would happen if all the 2001-2010 tax cuts had been allowed to disappear. Looked through that prism, the congressional Joint Committee on Taxation estimates the New Year’s Eve budget deal would add almost $4 trillion to the deficit over the next decade. Under that baseline, TPC figures Congress is cutting taxes by an average of about $1,800 per year. The top 1 percent would get an average tax cut of almost $26,000.

Finally, this deal takes one very important step. After more than a decade where nearly the entire tax code was temporary, Congress may be about to make most of the law permanent. Not all—those low-income credits are extended for five years and about $75 billion in temporary individual and business tax “extenders” were allowed to continue for just one more year.

Tax law stability normally is a very good thing. But is the revenue code really stable when it produces far less money than the government spends?  It is possible, though unlikely, that Congress will rewrite the entire code in 2013. But sometime soon, lawmakers will almost certainly have to dip back into the tax code for more revenue, making the details of the fiscal cliff deal ephemeral.

In short, this budget agreement will accomplish next to nothing. Congress is only buying time—and precious little of it.

18Comments

  1. Michael Bindner  ::  6:51 pm on January 1st, 2013:

    While the tax implications of the deal are $4 trillion on the minus side, recall that there have been cuts from the baseline having to do with the ending of the Iraq war and the eventual pull out from Afghanistan, as well as the passage of the Budget Control Act and its imposition of spending caps. There are also interest savings and non-quantified cuts due to health care reform, although we cannot be sure how the pre-existing condition drama will turn out for health insurers just yet and we won’t know until next year (unless investors get nervous before those portions of the law take effect). Additionally,. some of the essentially 25% tax rates on dividends and capital gains look like the opening shot in a debate on comprehensive tax reform occurring somewhere in the 20s, although I can’t see that happening without some kind of consumption tax (either a reciept visible Value Added Tax or a Subtraction VAT which simply treats labor as non-deductible).

  2. CBO on Fiscal Cliff Deal: $1 in Spending Cuts ($15 Billion) for Every $41 in Tax Increases ($620 Billion) - Tax1on1 | 美国税1on1  ::  7:20 pm on January 1st, 2013:

    […] Tax Vox Blog, Congress Kicks the Fiscal Can off the Front Stoop […]

  3. J. Mitchell  ::  9:33 am on January 2nd, 2013:

    Exactly what is the breakdown on these individual and business “tax extenders”? Aren’t these simply tax “loopholes”?

  4. Tax Roundup, 1/2/2013: Yay, we didn’t fall off the cliff! Too bad we’re still doomed. « Roth & Company, P.C  ::  10:28 am on January 2nd, 2013:

    […] Howard Gleckman, Congress Kicks the Fiscal Can off the Front Stoop (TaxVox) […]

  5. Vivian Darkbloom  ::  11:00 am on January 2nd, 2013:

    *Congress* Kicks the Fiscal Can Off the Front Stoop…..”

    “TPC figures Congress is cutting taxes by an average of about $1,800 per year.”

    “it looks like Congress isn’t even going to kick the fiscal can down the road…”

    “Congress will continue to spend far more than it is willing to collect in taxes”

    “Congress may be about to make most of the law permanent…”

    “It is possible, though unlikely, that Congress will rewrite the entire code in 2013”

    “Congress is only buying time—and precious little of it.”

    I had to re-read this article a couple of times just to be certain I did not overlook it. But, no, the words “President” and/or Obama¨ are not once mentioned. Apparently, according to Howard Gleckman and the Tax Policy Center, *Congress* is the only party responsible for this mess. The President, our nation’s highest elected official and supposedly our leader on the big problems facing the nation, whose tax and budget program were all but served up on a sliver platter and endorsed by the TPC, is now not part of the equation? The President bears no responsibility for this? Congress shares plenty of blame, to be sure; however, it is the President who just got elected, largely on the basis of an irresponsible tax and spending platform. I’m surprised Howard and the TPC are not putting the blame on Romney!

    Take a look at Howard’s earlier description of the Obama Tax Plan, pre-election:

    Actually, the bill just passed by *Congress* is largely what President Obama campaigned for: Higher taxes on the rich (albeit starting at $400K rather than $250 K which represents a relatively minor budgetary difference), higher taxes on capital gains and dividends, higher estate gift taxes and lower exemption amounts, re-introduction of PEP and Pease, and no cuts to spending—in fact, a net spending increase!. When that is what our highest elected public official campaigned for and got, why does *Congress* now get all the blame as if the President’s role is to sit idly by?

    Tax reform? Do you see any tax reform in that package? This is the same President who has completely ignored all the sensible recommendations made by the Bowles-Simpson Commission, which he appointed.

    How about deficit reduction? Here’s what Howard had to say about that: (link follows in next post)

    “Deficit Reduction: Obama would use both tax hikes and spending cuts to achieve long-term deficit reduction.”

    Of course, that was never the plan, and Howard knows it. I suggest we keep an eye on that claim in the weeks, months and years to come.

    Not only is the President largely to blame, but those who are enabling his non-existent deficit reduction plan and failing to hold him accountable are to blame as well.

    Apropos that, Howard, are you angling for a job as White House Press Secretary?

  6. Academic Economists React: Shortfalls of Fiscal Cliff Deal – Real Time Economics – WSJ  ::  1:28 pm on January 2nd, 2013:

    […] –The Tax Policy Center estimates the fiscal cliff deal would raise income taxes by an average of about $364, but nearly all of it would be paid by households in the top 0.7 percent of income. About three-quarters of those making $500,000 to $1 million would pay an average of about $10,000 more in 2013. About 98 percent of those making $1 million or more would pay higher taxes. And their tax bill would go up by an average of about $125,000. These estimates are relative to what people would pay under 2012 tax rules (the current policy baseline). However, they exclude the lost payroll tax cut which would add an average of about another $740 to every worker’s 2013 tax bill. –Howard Gleckman, Tax Policy Center […]

  7. Academic Economists React: Shortfalls of Fiscal Cliff Deal | Higher Education Programs  ::  1:45 pm on January 2nd, 2013:

    […] –The Tax Policy Center estimates the fiscal cliff deal would raise income taxes by an average of about $364, but nearly all of it would be paid by households in the top 0.7 percent of income. About three-quarters of those making $500,000 to $1 million would pay an average of about $10,000 more in 2013. About 98 percent of those making $1 million or more would pay higher taxes. And their tax bill would go up by an average of about $125,000. These estimates are relative to what people would pay under 2012 tax rules (the current policy baseline). However, they exclude the lost payroll tax cut which would add an average of about another $740 to every worker’s 2013 tax bill. –Howard Gleckman, Tax Policy Center […]

  8. House Approves Fiscal Cliff Tax Deal - Tax1on1 | 美国税1on1  ::  3:23 pm on January 2nd, 2013:

    […] Howard Gleckman (Tax Policy Center), Congress Kicks the Fiscal Can off the Front Stoop […]

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