Despite the proverbial sighs of relief over the passage of the “American Taxpayer Relief Act,” (ATRA) the measure only briefly–and barely– halts the nation from falling off the fiscal cliff.
Contrary to the claims of the White House, the ATRA does not prevent substantial tax hikes from hitting the middle class. The Tax Policy Center reports that the middle class takes a bigger hit proportionately than the so-called wealthy. 77.1% of all filers will pay more, at an average of $1,250 annually, due to the increase in the employee-paid portion of the payroll tax. A breakdown of the impact:
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INCOME (in thousands) : Yearly cost of increased payroll tax
20 $400
30 $600
40 $800
50 $1000
60 $1200
70 $1400
80 $1600
90 $1800
100 $2000
110 $2200
113,700 $2274
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In addition, the new 3.8% Medicare tax (a result of President Obama’s health care legislation) will hit workers hard.
Although the Bush tax cuts are made permanent, and the alternative minimum tax “patch” to protect the middle class is extended. Overall, the legislation represents the largest tax increase in two decades, and essentially reverses the paradigm established by the Reagan Administration.
A Drag On The Economy?
Nouriel Roubini, writing in the Financial Times, notes that the ATRA imposes a 1.2% drag on an already floundering economy that was only growing at only about 2%. Bloomberg reports that the payroll tax hike will pull over $100 billion out of US economy.
Perhaps reflective of that, “emergency” extended unemployment benefits, along with tax refunds for low income families and college students, will continue, at a cost of about $24 billion. Social Security, Medicare, and Medicaid will not be cut. Some studies indicate that this will eventually require $48 trillion in funding.
The ATRA does not address either the yearly federal budget deficits, which for four consecutive years has exceeded $1 trillion, or the long term national debt, which currently stands at $16,432,706,000,000. The Congressional Budget Officehttp://www.cbo.gov/ estimates that $4 trillion will be added to the national debt over the next decade, even if the sequestration cuts are fully implemented.
The implementation of sequestration cuts remains on the immediate horizon.
A major goal of the ATRA was the implementation of the President’s goal to increase taxes on higher income groups, although the “millionaire tax” was always a misnomer, since taxpayers earning in the $250,000 range will be detrimentally affected.
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KEY ATRA TAX INCREASES
MAXIMUM INCOME TAX RATE: INCREASED FROM 35% ($388,350 JOINT& SINGLE FILERS) TO 39.6% ON $450,000 JOINT TO $400,000 SINGLE
MAXIMUM RATE ON LONG-TERM CAPITAL GAINS & DIVIDENDS: INCREASED FROM 15% ($70,700 JOINT, 35,350 SINGLE TO 20% ($450,000 JOINT, 400,000 SINGLE)
PERSONAL EXEMPTION ELIMINATION & PEASE ITEMIZED DEDUCTION ELIMINATION: ($300,000, $250,000 SINGLE)
SOCIAL SECURITY PAYROLL TAX PAID BY EMPLOYEES: INCREASED FROM 4.2% ON EARNINGS UP TO $110,000 TO 6.2% ON EARNINGS UP TO $113,700
ESTATE TAX TOP RATE: INCREASED FROM 35% ON $5 MILLION TO 40% ON $5 MILLION
The biggest hit is on top 1%, a longstanding Obama goal. Those making $2.7 million will pay average $444,000 more in 2013. Households with income in the $500,000-1 mill pay average $14,800 more. The top marginal rate increases from 35 to 39.6%; those top earners would also pay increased taxes on dividends, capital gains, and carried interest income of private equity managers; the top rate increased to 23.8%. They also lose the $1,000 per child tax credit.
However, Bloomberg reports that a number of $500,000+ households can offset higher rates because deductions are subtracted from gross before the rate assessment.
States such as New York and California, with a higher average cost-of-living and salaries reflective of that, will be hit the hardest.
In addition, the death tax rate is upped to 40 from 35%. (Considering that it was 0% in 2010, that’s quite a leap.) The first $5 million is exempt for individuals, first $10 million for families.
Loopholes Continue
Some favored endeavors will receive or continue to receive special treatment. Extensive charges of crony capitalism have been levied, particularly since about $40 billion in breaks to special interests are contained in the measure. Of particular note is the tax credit given to Hollywood, a favored White House industry, which extends a production tax break for the first $15 million of production costs–and provides an extra $5 million break if the production takes place in traditionally Democrat depressed areas.
The White House has stated that $600 billion will be raised over ten years, significantly short of the original goal of $1.4 trillion.
While the measure was advertised as an attempt to both raise revenue and cut costs, the balance is tilted sharply in favor of tax hikes over spending cuts. According to a Heritage review of the bill, the measure has a 10:1 ratio of tax increases to spending cut; Breitbart estimates that the ratio is actually 41:1.
The ATRA delays by two month the implementation of automatic spending cuts.
According to the Wall Street Journal, “the most serious skirmish will arrive toward the end of February, when the U.S. treasury is expected to be unable to pay all the government’s bills unless Congress boosts the federal borrowing limits. Then on March 1, the across-the-board spending cuts of the fiscal cliff, deferred in this…deal are scheduled to be slicing into military and domestic programs. And on March 27, a government shutdown looms unless Congress approves funding for government operations for the reminder of the fiscal year, which ends September 30.”
CONSERVATIVE CRITICS
Conservative critics have voiced sharp objections. Rep. Rob Whitman (Va-R) explains his vote against the bill as follows:
“I regretfully voted against the American Taxpayer Relief Act…because it unfortunately does what Congress does best-kicks the can down the road…I could not vote for this bill because it does nothing to reform our long-term spending problems, which are the real drivers of our debt and deficits. In addition, this bill postpones sequestration, the disastrous defense cuts for only two months. This creates even more uncertainty for our defense industry, which is so vital to the security of this nation. This bill is the epitome of what is wrong with Washington-waiting until the last minute to pass a package negotiated by only a few…”
The most serious issues that were to be addressed by ATRA remain unresolved. The next round of negotiations, which begin almost immediately, will likely be even more contentious.