As I read through the American Taxpayer Relief Act of 2012 (The Act), I question where the “relief” is? While I understand President Obama and our Representatives’ attempt to advert the United States from having our country show an income statement that presents more expenses than income. This is basically what the fiscal cliff is - a final line drawn in the sand on how much debt the United States Government will have on the books. Hence, the fiscal cliff refers to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the U.S. budget deficit beginning in 2013 if existing laws remain unchanged. The deficit, which is the difference between what the government takes in and what it spends, is projected to be reduced by roughly half in 2013.
The Act attempts to address the major issues in order to advert our government and the economy from going over the “cliff.” However, in attempting to stop the government fiscal cliff crisis, for the first time in two decades, taxes on ALL American workers increased. This effectively ends a prolonged period of declining taxation that has become a defining characteristic of the U.S. economy. Every candidate for office since President Ronald Regan’s promise of lowered taxation has promised lower taxes.
The interesting effect from The Act is right off the bat every W-2 wage earner will see a 2% cut in take-home pay. Unlike income taxes, which rise along with a worker’s income, the payroll tax is a fixed percentage of an employee’s salary. Allowing the tax cut to expire increases taxes on salaries by 2 percent for every American worker. Up to $110,100 a year in salary is subject to the tax. The increase in taxes on workers means that “the era of asymmetrical tax policy — where taxes can only go down — is over,” said Jared Bernstein, a former White House economic adviser. “What’s been weird is in this history of taxation in America, there’s been this long period when it’s been forbidden to increase taxes at all.” This jump in payroll taxes, combined with other tax increases affecting the very wealthy as a result of the deal, would make for the largest increase in taxes in about half a century.
The tax increases come after a period of tax cutting that began in 1997 and continued through President Bill Clinton’s lowered rates on investment income; President George W Bush’s wide range of tax cuts and President Obama deep cuts in 2011 in attempt to jump-start a slow economy. Republican lawmakers refused to extend the low tax on the working class viewing the payroll tax holiday as contributing to federal deficits because the Treasury had borrow money to replace payroll tax revenue, which ordinarily would go to fund Social Security. The administration quickly dropped the payroll tax cut from negotiations.
As it does seem as though the middle and working class were indeed pushed off the cliff with the silent tax increase, the effects on the high-income earners are more. According to President Obama in a speech following the passing of The Act, he noted that under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up. He pointed out that the agreement reduces the deficit by raising $620 billion in revenue from the wealthiest households.
Highlights of The Act
- Extends tax cuts for income below $450,000 (couples) and $400,000 (single filers)
- Above those thresholds, raise the income tax rate from 35 percent to 39.6 percent, while capital gains and dividends rates go to 20 percent, from 15.
- Begins a two-month delay on the automatic $109 billion cuts to defense and non-defense spending.
- Extends and alters the tax credit for businesses' research and development.
- Patches the Alternative Minimum Tax to make annual fixes unnecessary for 10 years.
- Raises the highest rate on estate taxes to 40 percent, while keeping the current $5 million per person exemption.
- Extends federal benefits for long-term unemployed Americans by one year.
- Extends the child tax credit, as well as the child and dependent care credit, depending on income.
- Allow more conversions to Roth IRAs (which would bring in revenue, as it requires tax payments up front).
- Extends the farm bill for a year (avoiding the "milk cliff" crisis).
- Brings back limits on personal exemptions and some itemized deductions, for incomes of $300,000 (households) and $250,000 (singles).
- Postpones a planned 27 percent cut to Medicare payments to doctors.
I wonder what the real difference on individuals would have been if we had just let the government jump off the cliff. Let’s watch to see if The Act really will address the issues in full. Most analysts seem to hedge not.