By Ian Salisbury
Last Update: 3:07 PM ET Nov 15, 2012
By now, youve probably heard of the high-stakes budget standoff that Republicans and Democrats have to resolve by year-end. If they fail, a slew of painful tax changes including an end to breaks on everything from payroll taxes to dividends are set to kick in, triggering an automatic $500 billion tax hike that will affect nearly all Americans in some way. But whats the view from the bottom of the fiscal cliff? And how much would it cost you?
To answer these questions, the Tax Policy Center a joint project of the Urban Institute and the Brookings Institution, two left-leaning think tanks last month issued a study summarizing just how zooming over the cliff would play out for different tax payers. (See: Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?)
Of course, most experts still think lawmakers will eventually reach some sort of deal (or at least kick the can further down the road). If that happens, some but not all of these tax hikes are still likely to go into effect as part of any deal to fix the nations giant budget deficit. But just which ones is anybodys guess. (See: .)
Some details about the study: The Tax Policy Center broke taxpayers into five income segments, while also splitting the top quintile into smaller groups in order to show the effect on top earners in greater detail. We give the top income level for each cohort and the bottom income level for the top 0.1%, since for them, the sky is the limit. To make its estimates, the Tax Policy Center used cash income, which includes extras, like contributions to retirement plans, which you dont list on your tax forms.
You can also see a Web cast explaining the study on the Tax Policy Centers site. (See: Fiscal Cliff: How Much Would Taxes Rise in 2013?)
1. The Poor
- Income: $20,113
- Average tax rate hike: 3.7 percentage points
- Average tax hike in dollars: $412
- (Bottom Quintile)
Almost everyone would take a hit from the fiscal cliff, and the poor are no exception. One big reason: Theyve been benefitting from two emergency measures passed in the wake of the financial crisis in hopes of boosting the economy: A two percentage-point cut to payroll taxes and a 2009 stimulus bill expansion of certain tax benefits, like the child tax credit. While President Obama has proposed making some of these 2009 provisions permanent, few have suggested doing so with the payroll tax, which pays for Social Security. That means these low earners will likely pay more even if there is a compromise that avoids the cliff.
2. The Middle Class
- Income: $64,484
- Average tax rate hike: 3.8 percentage points
- Average tax hike in dollars: $1,984
- (Middle Quintile)
Middle earners benefit significantly from the Bush-era income tax cuts, which slashed rates across the board. While those cuts are also set to expire next year, both Republicans and Democrats have said theyd like to extend them for these taxpayers. That means unless there is a standoff, the hit to this group could be smaller.
3. The Comfortable
- Income: $108,266
- Average tax rate hike: 4.2 percentage points
- Average tax hike in dollars: $3,540
- (Fourth Quintile)
This group is another big beneficiary of the temporary payroll tax cut and the earlier Bush-era income tax reductions. One difference: Far more of these payers could be stung if Congress fails to raise the threshold for the alternative minimum tax, an alternative set of tax rules that does away with many deductions. Since Washington has done just that repeatedly in previous years, its a fairly good bet it will this time as well, absent a standoff. Politicians cant risk angering the middle class.
4. The Rich
- Income: $506,210
- Average tax rate hike: 5.2 percentage points
- Average tax hike in dollars: $14,871
- (Top 95% to 99% of incomes)
Obama campaigned on letting the Bush-era income tax rates expire on family incomes above $250,000 and won. But many of these high earners are the Main Street doctors, lawyers and business owners that Republicans see as the backbone of the economy. One area where the parties seem to agree: If no action is taken, the $5 million exemption for the estate tax could drop to $1 million next year, while rates jump to 55% from 35%. Neither side wants that to happen.
5. The Masters of the Universe
- Income: $2,655,675
- Average tax hike: 7.9 percentage points
- Average tax hike in dollars: $633,946
- (Top 0.1%)
Many Republicans dont want to raise taxes on anyone. While its hard for many people to have sympathy for someone that pulls in more than 100 times what those at the bottom of the scale earn, theyve got a lot of political clout. Among the provisions that could affect them most: hikes on capital gains and dividends. Rates these earners pay on dividend income could leap from 15% to more than 40%.
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