Commentary: 'Taxmageddon' on the horizon for U.S. economy

The Kansas City StarJune 10, 2012 

Warnings have been ringing for months now about the fiscal cliff the U.S. might tumble down on Jan. 1.

The calamity has also been tagged “Taxmageddon.”

But the harsh reality of what’s coming has been obscured by the presidential campaigns and by pre-emptive spinning over who’s going to be blamed.

The stalemate over what to do to avoid the fiscal cliff will continue until after the election, leaving President Obama and Congress just six weeks to devise solutions. That Obama may actually lose re-election and that Congress will be full of quacking lame ducks will just complicate matters.

Taxmageddon has four components, all slamming into the economy on Jan 1.

• Jobless benefits expire, a $40 billion hit.

• The Budget Control Act takes effect. As part of last summer’s deal to raise the debt ceiling, the parties agreed to $98 billion in spending cuts next year if an overall budget pact can’t be reached. The cuts would be divided between the military and domestic programs.

• The payroll tax cut ends, raising the tax that funds Social Security back to its previous level but taking $125 billion from taxpayers next year.

• The so-called Bush tax cuts of 2001 and 2003 end, resulting in a $280 billion tax hike on more than 150 million households.

The Wall Street Journal recently provided a summary of the wide-ranging end of the Bush tax cuts.

For starters, income tax rates will go up on everybody. The current 10 percent tax bracket will rise to 15 percent; the 25 percent bracket to 28 percent; the 28 percent bracket to 31 percent, the 33 percent bracket to 36 percent and the 35 percent bracket to 39.6 percent.

There will be a higher capital gains and dividend taxes. The long-term capital gains rate rises from 15 percent to 20 percent, while the maximum rates on dividends rises from 15 percent to 39.6 percent.

People now in the lowest two rate brackets, 10 and 15 percent, currently pay no taxes on long-term gains and dividends. If the tax cuts go away, they’ll pay 10 percent on long-term gains and 15 percent and 28 percent, respectively, on dividends.

The harsher marriage penalty will return because joint filer tax brackets will narrow. Wealthy taxpayers won’t be able to deduct as much as they do now because phase-out rules for itemized deductions will also return, as will phase-out rules for personal exemptions.

Some of the Bush tax cuts will likely survive because of bipartisan support. They include the inflation-adjusted exemption amounts for the alternative minimum tax and the deduction for qualified higher-education tuition and fees.

The current child-care tax credit, earned income credit, dependent-care credit and adoption credit also will most likely be continued. All were liberalized under the Bush tax cuts and later expanded even more.

In all, the Taxmageddon stalemate would be more than a half-trillion dollar blow. Three-quarters of that would come out of taxpayer pockets, with the rest being spending cuts.

All that taxpayer money would, of course, pour into government coffers.

Some might see that as a good thing. After all, before the Bush tax cuts the economy of the 1990s hummed along and the government, with spending restraints, ran an operational surplus for a couple of years.

The problem is, it’s just too big an adjustment. Taking that money from taxpayers all at once would just throw us back into recession.

A Congressional Budget Office report two weeks ago estimated that if we tumble down the fiscal cliff, the economy would shrink by 1.3 percent in the first half of 2013.

The whole enchilada, as former President Bush might say, comes down to what to do about the income tax cuts.

The payroll tax cut and unemployment benefits are designed to be temporary, ending once the economy gets stronger. And the scheduled spending cuts could be swept up in any compromise about income taxes.

(Compounding things yet again might be another bump into the debt ceiling around the first of the year or soon after.)

But Republicans aren’t now willing to accept any tax increases without huge spending cuts. While Democrats are willing to accept some smaller long-term cuts, they’re divided about the size of the tax boosts they want.

Obama wants to enact the Buffett rule hitting millionaires and raise taxes on married couples making more than $250,000.

House Minority Leader Nancy Pelosi says the threshold for married couples should be $1 million. She called anybody making less than $1 million “middle class,” a stand drawing criticism from the left.

At any rate, the tax hikes sought by Obama and Pelosi wouldn’t generate that much revenue in the scheme of things. They would barely make a dent in the deficit or provide much money for spending.

What the GOP wants just won’t fly. What the Democrats want in no way addresses the scale of the problem.

Serious talk about long-term spending solutions or tax reform that would help spur the broader economy has died away, even as the recovery sputters and the jobless rate ticks up.

Instead, leaderless, we walk steadily toward the fiscal cliff.

Again, just why didn’t we adopt the Simpson-Bowles compromise?

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