Tentative fiscal cliff tax deal would touch everyone

McClatchy NewspapersDecember 31, 2012 

— Rich and poor, young and old alike would be affected by the tentative deal to ease or avoid the effects of the fiscal cliff.

Everyone would pay higher taxes, including the working poor but especially the wealthy. More than 98 percent of taxpayers would escape more sweeping tax increases.

The unemployed would get an extension of jobless benefits. Doctors would avoid a planned cut in Medicare payments, one that might have led many to stop taking those patients. Heirs of big estates would pay more, but not as much as feared. Anyone who will get Social Security will continue to get annual increases without the restraint of a new, less generous cost-of-living formula. More than 31 million eluded the threat of being hit by the Alternative Minimum Tax.

The deal still must be approved by Congress, which missed a Monday night deadline to pass an alternative to many expiring tax cuts but which could presumably make its action retroactive. The House of Representatives planned to return to session Tuesday; the Senate sometime after that. Other deadlines lay ahead, with jobless benefits expiring Wednesday and $109 billion in doomsday budget cuts not scheduled to start going into effect until Wednesday.

Some details remained to be worked out Monday evening, particularly whether to delay the scheduled start of the spending cuts. But the rest of the deal offered a look at how it would impact Americans

The broadest effect was the apparent decision not to extend a temporary cut in the payroll tax that finances Social Security. As a result, every working American will see an immediate tax increase, with the rate going from 4.2 percent of their pay to 6.2 percent. The tax is taken out of roughly the first $102,000 in income.

The end to the payroll tax cut will mean that a worker earning $40,000 will pay about $2,480 in taxes the coming year, up from $1,680. That will cut take-home pay by about $30 every two weeks.

For individuals making up to $200,000 and families making up to $250,000, the rest of their taxes would remain the same, as the Bush-era tax cuts were made permanent for them.

The wealthy would get less generous tax breaks going forward.

For single filers with taxable income above $250,000 and couples $300,000, the tax credits and deductions enjoyed by most Americans would be phased out starting at those thresholds. The deal limits the total number of personal tax exemptions they can claim when filing income taxes, and limits the value of the itemized tax deductions they take.

Individuals with taxable income above $400,000 and families above $450,000 would see their top tax rate rise from 35 percent to 39.6 percent. They’d also pay higher taxes on capital gains and dividends, up from 15 percent to 20 percent. It could have been worse. Taxes on dividends were poised to revert to the rate of taxpayer’s ordinary income, as it was in the pre-Bush years.

In another compromise, lawmakers agreed to a raise the inheritance tax, sometimes called the estate tax, from 35 percent to 40 percent for inheritances above $5 million. This is an issue of great interest in farm states, where properties are left to children. Although the compromise reflects an increase, it is below the 45 percent rate sought by President Barack Obama on inheritances valued above $3.5 million.

On the other end of the income ladder, more than 4.8 million Americans in December were counted as jobless for six months or longer, or roughly 40 percent of the unemployed. Lawmakers Monday tentatively agreed to an extension of unemployment insurance benefits. The last 2012 checks were sent out on Dec. 29, and the long-term jobless have been facing the prospects of a very grim start to 2013.

For older Americans, it was what’s not in the deal that mattered. House Speaker John Boehner, R-Ohio, had pushed for a less generous measure of how Social Security benefits are adjusted annually, in a bid to cut $200 billion in spending over 10 years. That was left out of the deal, after opposition from AARP, the powerful lobby for seniors.

Similarly, doctors from coast to coast were bracing for a nearly 27 percent cut in reimbursement for services already rendered. Year after year, estimates for Medicare costs come in short, and Congress is left with the choice of finding more money or cutting what is already owed to doctors. The so-called “doc fix” had not been dealt with in all of 2012, and had it not been corrected, even tentatively, by midnight on Dec. 31, the cuts would have taken effect, encouraging more doctors to refuse to take Medicare patients and to potentially laying off health care workers.

Senate negotiators appeared to reach a deal to prevent the creeping alternative minimum tax from hitting 31 million tax filers. That tax, which has been patched annually, threatens families who claim multiple exemptions and deductions when filing their taxes. Multiple sources said the AMT would be fixed permanently, which would cost the treasury as much as $1.9 trillion over 10 years.

“The last-minute fiscal cliff deal prevents some of the major tax increases that would have occurred. With no time left before all tax rates would rise, the Chamber understands why lawmakers would choose to support it,” said Bruce Josten, vice president of government affairs for the influential U.S. Chamber of Commerce.

While the deal averted a major disaster on taxes, it punted on most tough issues and ensured that the thorny issues on debt, deficits and future spending on Medicare will hang over the economy in 2013.

It’s why budget watchdogs were far from impressed with the New Year’s Eve deal.

“Basically a pathetic Band Aid just to make markets happy with their nano-second mentality,” said Steve Bell, director of economic policy for the Bipartisan Policy Center and a former Republican chief of staff on the Senate Budget Committee.

Added the chamber’s Josten, “The new Congress and the administration must begin work immediately to slow runaway spending through structural entitlement reforms and spur faster economic growth through comprehensive tax reform and a rapid expansion of American energy. This is the only formula that can reduce budget deficits and control our unsustainable national debt.”

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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