Could 'Taxmageddon' trigger a new recession?

If Congress and the president drive over the fiscal cliff on New Year's Eve, the average American household will get slapped with a $3,500 tax hike next year.

By The Fiscal Times Oct 5, 2012 8:19AM

The Fiscal Times logoBy Merrill Goozner

If the lame-duck Congress and President Barack Obama drive over the fiscal cliff on New Year's Eve without passing new tax legislation or extending a host of expiring tax breaks, the average American household would get slapped with a $3,500 tax hike next year, according to a new analysis from the Tax Policy Center. Nearly seven out of every eight households would pay higher taxes.

Allowing the tax breaks to expire would theoretically raise $536 billion for the federal government next year, the analysis said, which is sharply higher than Congressional Budget Office projections that looked only at the fiscal year that began Monday. However, most economists believe a fiscal shock of that magnitude would immediately throw the economy into recession, which would sharply reduce actual collections.

No class of Americans would be exempt from so-called Taxmageddon except for the elderly who have no other income besides Social Security. Even the bottom fifth of earners -- those whose tax returns report less than $20,113 a year -- will get slapped with an average tax hike of $412. The 2 percentage-point payroll tax break, the earned income tax credit and the childcare tax credit will expire on January 1, 2013.

And for those in the upper half of the income distribution, the news is even grimmer. Indeed, the more one earns, the more one will pay in increased taxes, the TPC analysis showed. Households earning between $108,266 and $143,373 will pay an extra $6,359 in taxes next year. Nearly one of every four dollars they earn will go to the federal government, up from less than one in five now.

The top 1% of earners -- those earning more than a half-million dollars annually -- will see their taxes rise on average by $120,537. However, that average is skewed by the extremely high earnings in the top one-tenth of 1%. The superrich, the top one-tenth of 1% earning more than $2.66 million a year, will pay on average an additional $633,946 in taxes because of expiring reductions on long-term capital gains, dividends, estate tax reductions and the high end of the Bush-era tax cuts.

Other tax provisions expiring at the end of the year include the middle-class tax breaks, the alternative minimum tax and the so-called tax extenders, which include deductibility of state and local sales taxes, education credits and numerous business deductions and credits.

"For a government that raises about $2.5 trillion a year in revenue now, this would be a very large tax increase -- about 20% or more," said Donald Marron, the director of the Tax Policy Center, which is a joint venture between the Urban Institute and the Brookings Institution.

When asked if there was anything surprising about the findings, co-author Eric Toder, a senior fellow at the Urban Institute, said "part of the surprise to me was how big the tax increase was. It's just a huge, huge number."

Despite the magnitude of the tax hike, the study authors said it would only increase the total federal tax take to a shade over 18% of gross domestic product, which is about what the government averaged in taxes for most of the past half-century. Tax collections are currently running at less than 16% of GDP.

In responding to the Great Recession, politicians have largely relied on tax cuts to spur economic growth. The resulting reductions in revenue account for about half of the yawning federal deficit of more than $1 trillion a year.

However, there's no guarantee that allowing all the tax cuts to expire would have anywhere near the expected impact on reducing federal deficits. Most economists say allowing all the tax breaks to expire next year will throw the economy into a double-dip recession, which would push up counter-cyclical spending on the unemployed and reduce tax collections because fewer people would be working.

At least some of the tax hikes are likely to expire. Political leaders on Capitol Hill from both sides of the aisle are saying the payroll tax cut will expire. Most Americans never noticed the cut, according to public opinion polls. That would raise $115 billion in additional revenue next year, the TPC analysis said.

The largest amount of revenue would come from restoring the Clinton-era tax rates. Failure to renew the high-end reduction, which President Barack Obama has repeatedly said he won't sign if it is passed, would raise about $44 billion. Allowing the middle-class portion of the Bush-era tax cuts to expire would raise $171 billion next year, according to TPC.

Failure to renew the earned income tax credit (EITC), the child tax credit and education tax credits, which are disproportionately used by low-income households, will raise only $27 billion. But it will hammer each household that benefits from those programs at levels comparable to people who make a lot more money.

Just 22.4% of households in the bottom fifth of the income distribution make use of the EITC and other credits, the TPC analysis showed. Allowing those programs to expire along with the payroll tax reduction would increase taxes for that group by an average of $1,126 next year, which is nearly as much as people earning twice their salaries.

Merrill Goozner is a Senior Correspondent at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.

More from The Fiscal Times

Oct 5, 2012 9:31AM

We should have NEVER cut our payroll (i.e. Social Security) tax 2% to begin with. For a program that is going to go bankrupt eventually, reducing the tax is silly.


This is probably one tax I don't balk at even though I will not collect what I put in.


I disagree that we are being "slapped" with new taxes when they take away tax breaks. If the

Congress doesn't like the tax policy they put it law, then change it. We cannot dig out of this hole without closing some tax loopholes AND broadening the tax base from where we derive revenue $$.

Oct 10, 2012 12:47PM

What I would do

            No government sponsored aid to foreign countries.

            No prohibiting individual aid to a foreign country unless the country is an enemy.

            No tax on wages. No tax on investments. Tax on sales only.

            No aid to anyone who is not a citizen.

            No aid to anyone who is a drug addict.

            To be a citizen in full standing you must be born of two citizens or be born of one citizen on United States land. Being born of one citizen in a foreign country or being born in this country of two non citizens would give you the right of dual citizenship on your 18th birthday; you would not be entitled to any benefits you had not earned.

            No elected or hired employee of the government would be exempt from any law.

            No federal government employee would be allowed to belong to a union.

Oct 10, 2012 12:46PM

Taxes on wages are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.

The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.

Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.

Oct 8, 2012 11:28PM

There is no NEW recession. We havent moved beyond the last. Spins, funny math, political rhetoric, monetary stupidity, Wall Street financial manipulation, phony job reports, increased govt debt, CBO phony reports, temporary govt spending, borrowed I note, have only created an illusion of recovery.

Wake up people. We are in trouble with no smooth easy way out of our current situation.

God, family, country, self. Simple principles for social economic stability.Weve abandoned that priority list for self, self, self. God, family, country rarely factor into actions.


Oct 5, 2012 9:21AM

biden admitted yesterday THEY ARE RAISING YOUR TAXES




Oct 10, 2012 9:05AM

The tax debate nearly always leave out a critical component of the issue-how our tax money is spent. I and my friends dont begrudge paying our fair share, watever that is, but to se it used to bribe foreign despots, used as a reelection slush fund through entitlements and subsidies to friends associated with commercial enterprise, many of which are losers and projected to be so before the fact,

Most americans are aware of how their hard earned money is squandered but arent standing up to politicians and demanding accountability for how they allocate the funds.

Any program that requires borrowing to sustain should be abandoned.

The same principle should be applied to the education debate. Throwing more money year after year into educational entities has not improved results AT ALL. When you see the number of administrators and support personnel relative to classroom teachers, it is appaling. When you know the % of each $ allocated to education that gets to the classroom, you should be incensed and revolt. It wont correct itself, the unions have hi jacked the educational system for their own self interests.

Also, for years, college curriculums in education were degree factories. Easy course work relativeto other disciplines. The result was far more teachers than were needed which, in some states, resulted in low pay and low standards for classroom performance.

Apathy for years by us, the citizen, created the creeping mess we are in. Our only way out is to be highly energized in opposition to these practices. Borrow some strategy from unions and do anything short of illegall to take back control of publicly funded institutions. Show up at your elected reps homes, businesses , and school board members with FACTS about how they are squandering our future.Be civil, dont resort to the thuggery an extortion practiced by SEIU, other unions an racially centered causes. IF THEY DONT RESPOND APPROPRIATELY, VOTE THEM OUT OR IF APPOINTED, KEEP THE PRESSURE ON THEM

Oct 5, 2012 9:40AM
Just athought now, how is that changey and hopey working for you? Just wait till obama is reelected and you think you got pain with another four years the pain is going to kill America. You obqanites are the ones to blame and I hope you get paid back two foal.
Oct 6, 2012 3:19PM
The taxes coming is from the fiscal cliff when all the Bush tax cuts expire ! Its the congress who has to act ! We will have auto cuts across the board and defence takes the biggest ! And congress went on another 5 week vacation ! I say this cliff needs to come and when the debt limit comes this republican house needs to vote NO on raising it ! Let the cliff come and do not raise the nations debt limit ! That's the only way to start paying off the debt! Obama and the MITT WITT has nothing to do with the hikes coming ! Read the US constitution its congress who spends and taxes ! DUH ....
Oct 13, 2012 8:55PM

I heard excerpts of a politition's speech played on radio last week.  He explained how tax policy had become overbearing on business.  He considered supporting goverment action for short term relief but felt it was most wise as better long range solution to reduce the tax rate across the board, for business and individuals in order to establish a climate for long term growth & stimulate economic activity.   Had I not recognized the voice, I would have pegged  this politician as a current  Romney / Ryan supporter on the campaign stumping on their behalf , but it was not.


It was from a democrat;  John F. Kennedy in a speech in 1962, when the economy had slowed after the 1950's.   It opened my eyes how far Radical the current Democrats are from what the Party once represented.   The current Solutions offered by the Republican ticket mirror that of JFK in 1962 ! JFK- one of the most revered Democrats ever!

Oct 12, 2012 1:33PM
btw any idiot who would go out and buy a car because of the tax cut extensions in 2011 are reckless idiots...if you're that close to the edge stop digging...
Oct 11, 2012 2:28PM

"And for those in the upper half of the income distribution, the news is even grimmer. Indeed, the more one earns, the more one will pay in increased taxes, the TPC analysis showed. Households earning between $108,266 and $143,373 will pay an extra $6,359 in taxes next year. Nearly one of every four dollars they earn will go to the federal government, up from less than one in five now."


Yea, that makes me want to run right out now and buy a home or car.


What a joke....


GO ROMNEY 2012!!!


Maybe we should take the "taxmageddon" even if it does damage the economy in the short term because our national debt is spiraling out of control and it is a lot easier to let breaks expire than to pass new legislation addressing this.  
Oct 21, 2012 3:42AM
Well Ben Stein said it all on FOX News what i have been saying all along ! Tax cuts do not create jobs and we cannot balance the budget with just tax cuts alone!!!! And Wayne Rogers of Fox said what i have been saying all along !!! The US Congress are the ones that must act.. And they are still on VACATION America.... DUH.....
Oct 10, 2012 2:16PM

Let's see...


"The top 1% of earners -- those earning more than a half-million dollars annually -- will see their taxes rise on average by $120,537."


Ok, let's do the math:  The AVERAGE pay of a worker in (for example), factory or other industry:  45 to 60,000 (take home pay):


Now, let's look further:


"THE RICH"  About to lose an additional 120,537.00 out of their OWN POCKETS.


Solution for said "rich":  Divide 120,537 by 3=40,179.00  = 3 LAID OFF WORKERS

Or,  divide that number by 2, which = 60,268.50= 2 LAID OFF WORKERS


Let's face this fact too.  THE RICH WILL STILL BECOME RICH, BECAUSE THEY'VE EARNED IT, PERIOD.  And as ALL business/rich people do, they will do whatever's necessary to see that their PERSONAL bottom line is NOT disrupted.  They cannot be faulted for that.  That is HUMAN NATURE.


These are, of course rough numbers, but the REALITY these DEMS fail to realize, is it could become FACT in a hurry.  I'm sure that this was a part of Nobama's recovery to "hope and change" too, right?




GO ROMNEY 2012!!!



Oct 12, 2012 1:31PM
avatar's about time these irresponsible idiots pay their taxes...everyone has been fighting for money from the government for years and now the bill has come due...hmmm let's play kick the can down the road for someone else to deal with, that was bush's motto...cut taxes on the rich, that's romney's motto, drive the country deeper into debt, that's the citizen's motto...before this is done the country will be 23 trillion in debt with a debt payment of 2 trillion per year and only 200 billion left for all government agencies.  that is what these insurgant militant's want...the destruction of the united they can go back home and live on the prairie with their covered wagon...that and the neo liberal jerkwater idiots making up their own ideas of living, and this country is in a precarious place indeed.  Guess the feminist agenda of burning the country to the ground is coming full circle.
Oct 9, 2012 6:11PM
Let's get this straight...we'll be paying more - well I see it as we'll be paying what we should be paying and should have been all along.  People got a break over the last few years - just say thanks.  But we are finding that a good thing may be easy to give, but it is murder to take away, isn't it?  What these tax breaks have done, in part, is allowed people to live a little bit larger than they should have been living - now, faced with removal of some credits, cuts and favorable rates, many who have set their lifestyle on spend 90-100% takehome are going to find that maybe they are once again living beyond their means.  Sure, government needs to tighten up their ship too - I'd be upset if the extra revenue was pissed away (well part of it will be in the form of interest, of course).
Oct 9, 2012 3:13PM

The super negative right just wont be happy unless we go into another great depression. The obstructionist rights in Congress have been sitting on their azz for four years hoping the economy dies.  The Fortune 500 "job creators" (in other countries) are sitting on a couple trillion, enjoying the lowest taxes in over 60 years. Too bad 1950's dollars arent the same as 2012 dollars. Obama wants to keep the cuts for the middle only, Congress doesn't want any part of taxing the rich.  Romney flat out claims he will raise taxes on the middle and the top. Of course that was moderate Mitt, not Conservative Mitt. Too many Mitts, I cant keep track. 

Oct 5, 2012 2:35PM

All I can say is for those who vote for OBummer---You'll get what you wish for----Hope you saved enough money to pay all of these taxes coming after your wallet!!---

Einstein revisited---If you could run around a tree at 185,999.9 miles per second --it's virtually possible to screw yourself--or with a vote for Obummer--that would end up with the same result


Obummer would sell Michelle to a Brothel to get re-elected!!!

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