The Tax Policy Center—a joint project of the Urban Institute and the Brookings Institution—has a lineage that in Washington think tank circles is as impressive as a marriage between a Cabot and a Lodge. As a result, the press understandably gave lavish attention to an October 1 report by the center calculating that “middle-income households would see an average [tax] increase of almost $2,000” if the federal government goes over the “fiscal cliff.”
More than two months later, these numbers remain embedded in the media coverage of the budget showdown between Barack Obama and Republicans in Congress. The Washington Post highlights the Tax Policy Center estimates in an interactive “Fiscal Cliff calculator: What it means for me,” while Slate’s analogous feature asks, “How Far Would You Fall Down the Fiscal Cliff?” And a New York Times article last week stated, “If the two parties fail to come to a deal by Jan. 1, taxes on the average middle-income family would rise about $2,000 over the next year.”
For most Americans, the largest single component of this purported tax increase would be the full expiration of the Bush-era tax cuts at the end of the year. That is the principal reason why a married couple making $106,000 a year could see its taxes rise by 18 percent.
That’s a number that might startle some taxpayers. And Obama has only added to a sense of alarm with campaign-style events such as his December 6 visit to the Falls Church, VA, home of Richard and Tiffany Santana. Using that $2,000 figure (and doubling it because Tiffany’s working parents live in the same household), the president said, “A couple of thousand dollars means a couple of months’ rent for this family.”
To raise the stakes a bit higher, Obama added this warning during his visit with the Santana family: “We’re in the midst of the political season. I think the American people are counting on this getting solved. The closer it gets to the brink, the more stressed they’re going to be.”
The media has only displayed intermittent skepticism about these claims—and, as a result, has been complicit in fiscal cliff hyperbole. In this case, it is the job of the press to lessen stress rather than exaggerate it. The problem with all the downbeat forecasts—whether the Santana family’s potential problems with their rent, or that 18-percent tax increase for a prosperous married couple—is that they simply will not happen in any known political universe. The chances are greater that the dire prophesies in the Mayan calendar are correct than that Congress will let the Bush tax rate cuts expire for anyone other than the wealthiest Americans.
Obama has already signaled that he is willing to keep the lower rates on annual taxable income below $400,000. House Speaker John Boehner says his threshold is $1 million.
No one in elective office wants to raise the income tax rates of our hypothetical family earning $106,000. If that were a real possibility members of Congress might as well retire now, since that would be their collective career arc if they somehow failed to preserve the Bush tax cuts for most voters.
(It is true that all wage earners will probably take a bit of a fiscal hit in 2013, since the temporary two-percent reduction in payroll taxes appears not likely to be renewed. The Bush tax cuts, however, are a larger factor than the payroll tax rollback for every income group above the bottom 20 percent).
Much of this breathless media coverage rests on the implication that tax rates will unalterably rise if a deal is not reached between the president and Congress by New Year’s Eve. Wrong. As a few stray articles, such as an October 9 Times piece by Annie Lowrey, have pointed out, the Treasury legally could delay sending out new withholding tables to employers if no deal is reached by the deadline. If the withholding tables remain the same and the extension of the Bush tax cuts is made retroactive to January 1, then the brief income tax hikes will have been entirely theoretical for most Americans.
Your overall point is correct. However, under all current proposals, the payroll tax cut will expire (as you acknowledge).
This will increase taxes by 2% for all (up to the approx $100,000 income limit). A family with $50,000 income will pay another $1,000 and a family with $100,000 income will pay another $2,000.
It may not be the apocalypse, but it will hit most and will depress the economy (estimates are 0.6% of GDP in 2013).
#1 Posted by foosion, CJR on Wed 19 Dec 2012 at 03:57 PM
"For most Americans, the largest single component of this purported tax increase would be the full expiration of the Bush-era tax cuts at the end of the year. That is the principal reason why a married couple making $106,000 a year could see its taxes rise by 18 percent."
Is there a reason you chose that figure? Because looking at the table in that link shows that the differences between most tax rates with various martial statuses and various incomes is about 3% - 5%, the exception being the 60,350 to 72,300 tax bracket which goes up 13% on every dollar above $60,351.
Then, I guess, you're adding the rate of that marginal income to the expiring 2% reduction of FICA taxes capped at $106,800 for 2011? And then, in those special cases, with those special rules of marginal rates being attached to full income, we still don't get 18%? So your example isn't representative and is likely inaccurate, so why was it chosen?
The first sentence in the abstract really states the paper's story, "The fiscal cliff threatens an unprecedented tax increase at year end."
The increase is 'unprecedented'? Maybe. Are the rates unprecedented? No. They are Clinton's rates.
http://www.cbo.gov/publication/43373
"Average tax rates depend on tax laws and economic conditions. The average federal tax rate—that is, households’ federal tax liabilities divided by their income (including transfer payments) before taxes—was 17.4 percent in 2009 for all households and ranged from 1.0 percent for households in the lowest quintile to 23.2 percent for households in the highest quintile (and to 28.9 percent rate for households in the top percentile).
The overall average federal tax rates of 18.0 percent in 2008 and 17.4 percent in 2009 were the lowest in the 1979–2009 period and were well below the previous low of 19.4 percent in 2003 and the average of 21.0 percent over that period. For most income groups, the 2009 average federal tax rate also was the lowest observed in the 1979–2009 period. The pattern in the intervening years is more varied, reflecting the interaction of numerous changes to tax law and changes in the composition and distribution of income."
Why are they unprecedented? Because the Bush Tax Cuts were unprecedented give aways in response to recessions in 2002-2003. Did those tax cuts work?
No.
Then what will be the real effect when those tax cuts are gone?
Minimal. About as much as the effect they had when they were there.
What has had, and will continue to have, a greater effect on economic growth and the economic well being of all Americans is the contraction of the state. We're in a depression, a financial shock. We need to help put the broken economy back together before ripping off the fiscal bandages holding it in place.
#2 Posted by Thimbles, CJR on Wed 19 Dec 2012 at 06:29 PM
The other thing that would be nice is if you had, by each of those income figures, what quintile those incomes represent.
Because that family with an income of a hundred grand? According to here is in the upper bracket of the top 80%:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=330
Once again this is not representative. For the bottom 20%, that's like five years income.
Reset your definitions of middle class and poor, you people of means who are reporting on this subject.
#3 Posted by Thimbles, CJR on Wed 19 Dec 2012 at 09:11 PM
To help you re-orient:
http://www.charlotteobserver.com/2012/12/15/3728216/mcdonalds-825-per-hour-highlights.html
"CHICAGO Tyree Johnson scrubs himself with a bar of soap in a McDonald’s bathroom and puts on fresh deodorant. He stashes his toiletries in a Kenneth Cole bag, a gift from his mother who works the counter at Macy’s, and hops on a train. His destination: another McDonald’s.
Johnson isn’t one of Chicago’s many homeless people who seek shelter in fast-food joints. He’s a McDonald’s employee, at both stores – one in the Loop, the other about a mile away...
He needs the makeshift baths because hygiene and appearance are part of his annual compensation reviews. Even with frequent scrubbings, he said before a recent shift, it’s hard to remove the essence of the greasy food he works around.
“I hate when my boss tells me she won’t give me a raise because she can smell me,” he said.
Johnson, 44, needs the two paychecks to pay rent for his apartment at a single-room occupancy hotel on the city’s north side. While he’s worked at McDonald’s stores for two decades, he still doesn’t get 40 hours a week and makes $8.25 an hour, minimum wage in Illinois...
The pay gap separating fast-food workers from their chief executive officers is growing at each of those companies. The disparity has doubled at McDonald’s Corp. in the last 10 years, according to data compiled by Bloomberg.
At the same time, the company helped pay for lobbying against minimum-wage increases and sought to quash the kind of unionization efforts that erupted recently on the streets of Chicago and New York...
Johnson would need about a million hours of work – or more than a century on the clock – to earn the $8.75 million that McDonald’s, based in the Chicago suburb of Oak Brook, paid then-CEO Jim Skinner last year. Johnson’s work flipping burgers and hoisting boxes of french fries, like millions of other jobs in low-wage industries, helps explain why income inequality grew after the 2007-2009 recession ended.
The recovery from the last downturn has been the most uneven in recent history. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to census estimates. Earnings fell 1.7 percent for the 97 million households in the bottom 80 percent – those who made less than $101,583."
You know, whether it comes in the form of a tax cut or a salary cut, a reduction in spendable income is a reduction in spendable income. By focusing on taxes, we may be ignoring the biggest problem. It's the 44 year olds who need to work two part time minimum wage jobs and the long term unemployed depressing the labor market.
What are we going to do about that crisis?
#4 Posted by Thimbles, CJR on Thu 20 Dec 2012 at 11:27 AM
I have been following the news connected to the fiscal cliff and I'm worried about what's gonna happen next. As a Canadian investor working in real estate I've been analyzing the possible risks in this particular sector and the outlook for 2013 is quite optimistic as far as the real estate market in Canada is concerned. However, there are certain threats that could put a halt to that positive development, one of them being inflation pressures out of the US. The mutual interconnection between the two countries is very strong so I hope the US government will do its utmost to find a solution to the fiscal cliff and thus prevent the worst from happening.
#5 Posted by Jeremy, CJR on Mon 24 Dec 2012 at 04:44 PM