The fiscal cliff deal that House Republicans and President Obama agreed to on New Year’s Day means that a return to recession is almost inevitable. The House voted Tuesday night to approve the deal, officially named the American Taxpayer Relief Act of 2012, which essentially gives President Obama and the Democrats everything that they wanted.
The Wall Street Journal notes that the deal, the biggest tax increase in 20 years, is being cynically spun as a tax cut for the middle class. Nothing could be further from the truth. Even though income tax rates only increase on income above $400,000 ($450,000 for joint filers) there are no tax cuts for anyone and all Americans will pay more in taxes in 2013. Additionally, because joint filers can only earn $250,000 each before the higher rates take effect, the marriage penalty is being returned.
According the Journal’s analysis of the deal, there are a multitude of tax increases that will affect every American, not just the wealthy. The death (estate) tax, which affects many family farms and businesses, will increase from 35 to 40 percent. The capital gains and dividends taxes will rise from 15 percent to 23.8 percent. This includes a 3.8 percent Obamacare investment income surtax. While often associated with the wealthy, the capital gains and dividends taxes affect anyone with a 401(k), an IRA, or any other type of investment. Many countries that compete with the U.S. for international business do not have capital gains taxes at all.
There are also other tax increases associated with Obamacare that will now take effect. The medical device tax is a new 2.3 percent excise tax on medical equipment. There is also an additional Obamacare payroll surtax on incomes above $200,000 ($250,000 for joint filers) of 0.9 percent.
Finally, the payroll tax holiday is expiring. This means that taxes on income up to $113,700 will increase by two points to 6.2 percent. According to an analysis by CBS, this means that a worker earning $50,000 would pay almost $1,000 more in payroll taxes in 2013. According to the Tax Policy Center, the average taxpayer will see an increase of $1,257.
The total cost of the tax increases in the deal is $620 billion over ten years according to Forbes. This represents money that will not be available to small business owners to expand or hire new workers, that families will not be able to spend or save for their own needs, and that will be diverted from wealth-building projects into tax shelters to avoid the new Obama tax increases. As $620 billion exits from the fragile U.S. economy, there will almost certainly be a contraction that will lead to another recession.
New tax increases were unavoidable given President Obama’s reelection and would have been more palatable if they had been accompanied by meaningful spending cuts. Under President Obama, the federal government has run deficits in excess of $1 trillion every year. The so-called emergency stimulus spending has become permanent. Erskine Bowles, Bill Clinton’s chief of staff and head of Obama’s own deficit commission, recently was quoted by the Wall Street Journal saying, “If we're going to raise revenue and if we're going to raise it in any form, then we darn well better cut spending, because spending is the biggest part of this problem.”
So how did the fiscal cliff deal handle the deficit spending issue? Spending and the associated borrowing actually increase under the compromise. According to the Congressional Budget Office, the deal will increase federal spending by $332 billion over 10 years. Deficits are projected to rise by $3.9 trillion. This means that the ballooning federal debt will continue to crowd out private investment and act as a drag on the economy.
The fiscal cliff deal is a clear victory for President Obama and the Democrats and presents the country with the worst of both worlds. Taxpayers and businesses will be faced with massive tax increases in an already weak economy paired with still more increases in federal spending, borrowing and growth of government.