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Fiscal cliff

Published October 14, 2012 4:51 pm

Spare the middle class
This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

By now you've heard of the fiscal cliff. That's the name for what would happen next year if all of the Bush and Obama tax cuts and credits were allowed to expire, raising the nation's tax bill by a cool $500 billion in that year alone. That's what's scheduled to happen under current law. However, sucking that much money out of the economy at once would push the United States back into recession. The two political parties in Congress can't agree how to keep the nation from falling off this cliff, although quiet negotiations are under way in the Senate.

To better understand what's at stake, and the arguments that the two parties are making in the campaign, it is useful to consider how the end of the various tax cuts would affect federal revenues. It's a way to measure their relative size.

That's where the Tax Policy Center comes in. It released a study Oct. 1 that puts some numbers — very big numbers — into the debate. It is titled, appropriately, "Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?"

Bear in mind the $500 billion total. Of that, the biggest chunk — $171 billion, or one-third — would come from tax increases on low- and middle-income taxpayers caused by the expiration of the Bush cuts in income-tax rates. Politically, then, it makes sense for President Obama to argue, as he does, that the tax cuts for the middle class should be extended. But it also makes economic sense, because a tax hike for middle-income taxpayers would severely crimp their buying power and put the squeeze on the economy. For the middle 20 percent of taxpayers, the tax increase would amount to about $888 on average, according to the Tax Policy Center.

The second-largest hit to taxpayers in terms of total revenue would come from the death of the 2 percentage point cut in payroll taxes that Obama pushed through as part of the economic stimulus. That would amount to $115 billion, or 22 percent of the $500 billion total. For the middle 20 percent of taxpayers, that burden would amount to $672, on average.

The third-largest category? Short-term taxes that affect businesses and some individuals. They amount to $75 billion.

The fourth-largest category applies mainly to Bush cuts in income, dividend and capital gains rates for the wealthy. They account for $52 billion, or about 10 percent of the total. Democrats argue for letting those expire so that unearned income is taxed at rates closer to wages.

The final two large pieces are the Alternative Minimum Tax, which applies mostly to upper-middle income taxpayers, at $40 billion, and the estate tax at $31 billion.

In terms of economic impact and equity, the numbers argue for sparing the middle class.