As Congressional leaders and the President negotiate a deal designed to avoid the “Fiscal Cliff”, the drama of the public back-and-forth in Washington often obscures the consequences of failing to reach an agreement. The Fiscal Cliff is made up of significant increases in personal and business taxes and dramatic decreases in federal government spending scheduled to take effect on January 1, 2013. If these policies take effect (a.k.a. “going over the Fiscal Cliff”), they would impact individual families and businesses, as well the broader economy.
What does the Fiscal Cliff mean for personal taxes?
Dozens of personal tax breaks run out on December 31, 2012. Most significantly, the expiration of tax cuts enacted in 2001 and 2003 (generally referred to as the “Bush Tax Cuts”) would raise tax rates on ordinary income and investment income and would eliminate popular deductions. January 1 also brings the expiration of a temporary patch to the Alternative Minimum Tax (AMT), which significantly limits the use of deductions. In 2011, approximately 4 million taxpayers paid the AMT. If Congress fails to act, an additional 26 million taxpayers could be required to pay the AMT in 2013, increasing their taxes by an estimated average of $4,200 each. The payroll tax cut passed in the 2009 stimulus package that reduced Social Security taxes by almost 30 percent is also scheduled to expire at the end of 2012, reducing take-home pay for working families by about $1,000 per year. A new tax on investment income and earnings for upper-income taxpayers is also scheduled to take effect on January 1.
What does the Fiscal Cliff mean for corporate taxes?
While personal tax increases make up the bulk of the fiscal cliff tax discussion, several tax increases are set to impact corporate taxpayers if policymakers fail to strike a deal. Corporate tax breaks for conducting research and development in the United States, hiring veterans, and investing in energy saving technologies must be extended to allow businesses to use them for their 2012 returns. In addition, a number of business taxes passed as a part of the Affordable Care Act take effect in 2013 and 2014, including a new excise tax on medical devices and a tax on insurance plans. These two taxes are set to cost these industries approximately $2.4 billion and $8 billion, respectively, in their first year alone.
What are policymakers saying about Fiscal Cliff taxes?
Following the 2012 elections, both parties have publicly drawn lines in the sand on taxes, focusing their messages on personal tax rates. The President has argued for extending current rates for households with incomes under $250,000 and increasing tax rates for those above that mark. In response, Republican leaders have continued their calls for extending all expiring income tax rates, while some rank-and-file Republicans in Congress have expressed a willingness to consider increases in some tax rates. Both sides have discussed eliminating deductions and credits for those making over $250,000. Congress is also considering extending some business tax cuts and delaying the new device tax in a Fiscal Cliff package.
Links to Other Resources
- Congressional Research Service (CRS) – The “Fiscal Cliff”: Macroeconomic Consequences of Tax Increases and Spending Cuts (R42700)