By the Editors November 12, 2012
With the election over and hurricane season coming to an end, the great challenge facing Congress and the Obama administration is the approach of the so-called fiscal cliff, a collection of policy changes scheduled to raise taxes and scale back federal spending in 2013.
Economists, tax policy analysts and market watchers agree that if these policies remain unchanged and are allowed to go into effect, the damage to the US economy would be horrific. But what does horrific mean? What exactly is going to happen, and how bad could things really get?
Two independent, non-partisan groups took a stab at sizing up the fiscal cliff and its aftermath. The Tax Policy Center published a report explaining precisely what would happen to tax rates and revenue. The Congressional Budget Office published a projection for what those changes in tax policy – and the reductions in federal spending – would do to economic growth. Here’s what they found.
If tax policy remains untouched…
• Total tax revenue will increase by $514 billion.
• The expiration of the 2001-2003 tax cuts (commonly and subjectively referred to as “the Bush tax cuts”) would raise taxes by $156 billion.
• The current marginal tax rates would be realigned like so.
Now After
10% N/A
15% 15%
25% 28%
28% 31%
33% 36%
35% 39.6%
• The capital gains tax would increase from 15% to 23.8%, and the maximum tax on dividend income would rise from 15% to 43.4%.
• The child tax credit would shrink from $1,000 to $500.
• The payroll tax holiday would expire. Employees’ contribution to Social Security would rise from 4.2% of their taxable income to 6.2%, raising tax revenue by $125 billion.
• The patch on the Alternative Minimum Tax would expire, raising the number of taxpayers exposed the AMT from about 5 million to about 20 million and increasing tax revenue by $88 billion. The states most affected would be New Jersey, New York, Massachusetts and Maryland.
And here are the projected consequences for the economy…
• The economy will fall back into recession. The gross domestic product will contract by 0.5% in 2013.
• The unemployment rate will rise from its current level of 7.9% to 9.1% by the fourth quarter of 2013.
And a couple suggestions from the CBO…
• Abolishing the coming spending cuts dictated by the Budget Control Act of 2011 and delaying the planned reduction in Medicare reimbursements would raise GDP by 0.75% by the end of next year.
• Extending all 2001-2003 tax cuts except the payroll tax and pinning the Alternative Minimum Tax to inflation would raise GDP by almost 1.5% by the end of next year.
Read the Tax Foundation’s full primer on the fiscal cliff here.
Read the Congressional Budget Office’s full report on the economic effects of going over the fiscal cliff here.
This entry was posted on Monday, November 12th, 2012 at 7:32 am. It is filed under Tools & Resources and tagged with AMT, CBO, economy, fiscal cliff, gdp, growth, tax brackets, tax policy center, taxes. You can follow any responses to this entry through the RSS 2.0 feed.
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