On November 7th, while cleaning crews are still tidying up from election night parties, America’s political class will be hurling themselves into another essential battle over government spending, taxes and debt. On January 2nd, 2013, absent some kind of budget deal, America will fall off the “fiscal cliff” and face a massive tax increase and across the board cuts in government spending. Like most crisis these days, it’s a creation of politicians.
A new study from the Brookings Institution’s Tax Policy Center finds that the expiration of the Bush-era tax cuts at the end of the year will hit Americans with a $500 billion tax hike. While liberal talking points suggest that only the wealthy received a tax cut under Bush, in fact every income group saw their taxes reduced. The rich got “more” tax cuts for the simple reason that they pay more in taxes. The expiration of the Bush tax cuts will hit everybody.
An average middle-class household — making between around $40,000 to $65,000 — would see an almost $2,000 tax hike next year, while those making under $20,000 a year would see their bill rise by an average of just over $400. Both groups would see their after-tax income drop by around four percent.
But households in the top 20 percent of earners would take a $14,000 hit, and those making a half million dollars or more a year — the top one percent of taxpayers — face an average $120,000 increase. That top one percent would see a more than 10 percent hit to their after-tax income.
According to the study, almost nine out of ten households would see higher taxes. The economic impact is likely to be disastrous, as the economy is already teetering on the brink of recession.
The companion to this debate will be a fight over “sequestration,” a process triggering across-the-board spending cuts throughout government. The anticipated cuts fall heavily on defense programs, which could lead to wide-spread layoffs and cuts in military forces. This event was caused by last year’s punt on the debt ceiling fight. It was meant to be a “trigger” to pressure the President and Congress to come up with a real plan to reduce government spending.
The Senate Democrats have failed to produce even an annual budget in the past 3 1/2 years, so no surprise that they failed to agree to a plan to cut government spending.
Congress will have two months to sort out this mess after the elections. Much of what happens depends on the outcome of the elections. If Obama loses, it’s doubtful he’ll be in any kind of mood to avert the tax hikes or across-the-board cuts. He’s more than petulant enough to let Romney inherit his mess.
If the GOP makes significant gains in Congress, they too may want to wait until the new Congress is sworn in, when they’ll have greater leverage to take action.
Keep in mind, though, that this whole “fiscal cliff” mess was brought to you by the very people who are supposed to fix it. At some point, you have to stop punting and actually fix the problem.