Whatever you paid the feds in taxes last year, you’ll most likely pay more in 2013. That’s because the fiscal cliff deal cut by Congress and President Obama allows tax provisions that benefited almost all American workers and their families to expire.
To folks outside of Washington, this means President Obama and Congress raised your taxes. But because of technicalities with how spending and tax policies are counted inside the Beltway, the politicians are going to tell us they cut our taxes. Don’t believe it.
In all, this deal will raise taxes by more than $600 billion over the next 10 years. A large portion of that will come from tax increases on “the rich”: families making more than $450,000 a year or individuals making more than $400,000 a year.
But the middle class did not escape the fiscal cliff unscathed. They’ll pay more in 2013 because Congress allowed an increase of the Social Security portion of the payroll tax. Congress and President Obama originally agreed to lower that tax rate from 6.2 percent to 4.2 percent back at the end of 2010 for just one year (2011). They then agreed to extend it for 2012. Letting that rate go back up will hurt middle class checkbooks.
The tax increases on “the rich” (most of whom are small-business owners who aren’t incorporated) won’t hit many middle class pockets directly, but they will hit the middle class indirectly. Indeed, the tax hikes will affect Americans at every income level, because they will slow the economy. Slower economic growth will reduce opportunity, job creation, and wage growth.
The deal raises the top tax rate, the rate paid by small businesses and investors (America’s job creators), from 37.9 percent (including the 2.9 percent Medicare payroll tax) to 43.4 percent this year (including the higher 3.8 percent Medicare payroll tax from Obamacare) for incomes above $450,000 for married filers and $400,000 for single filers.
True, this is slightly better than President Obama’s initial demand for rate hikes for those earning more than $250,000. But it will still hamper job creation. The accounting firm Ernst & Young found that Obama’s plan to raise rates above the $250,000 threshold would have cost the economy more than 700,000 jobs. Raising the income threshold to $450,000 won’t do much to lessen the job losses.
Worse for the economy and jobs, the deal increases the tax bias against investment by raising the tax rate on capital gains and dividends for taxpayers with incomes above $450,000 from 15 percent in 2012 to 23.8 percent this year (this includes the new 3.8 percent Obamacare surtax that began on January 1).
It also raises the death tax rate from 35 percent in 2012 to 40 percent in 2013. A tiny consolation for grieving families is that the exemption will remain above $5 million and be indexed for inflation.
These tax hikes on investment will further dampen investment and result in even less job creation. This is more bad news for the 12 million unemployed Americans.
Amidst the gloom of the deal, there was some good in it: The harmful defense sequester cuts were postponed and most tax hikes were avoided. But there can be little doubt the bad — tax hikes that will hurt the economy and do little to tame the deficit — outweighed the good.
President Obama has his long-sought tax hike on “the rich,” and doesn’t seem too concerned that he had to raise taxes on the middle class in the process. But even with those tax hikes in his pocket, a debt crisis still stares us squarely in the face. And the rich and the middle class combined don’t have enough income to pay it back.
It is finally time for President Obama and Congress to focus on avoiding a debt disaster. And that will require cutting spending by reforming entitlements. Divisive and distracting class-warfare tax hikes will damage the economy, but they can’t solve our debt problem. It’s past time for our leaders to get serious and tackle the real fiscal problem: massive government overspending.
Curtis Dubay is senior tax analyst in The Heritage Foundation’s Roe Institute for Economic Policy Studies.
