U.S. households are facing an average tax increase of $3,446 in 2013 if Congress doesn’t avert the so-called fiscal cliff, the nonpartisan Tax Policy Center said in a study released today (Oct. 1).
The top 1% of households face some of the largest tax increases in 2013 and would see their after-tax incomes fall by 10.5 percent if Congress does nothing. That would translate to an average tax increase of $120,537 for that group.
A typical middle-income household earning between about $40,000 and $60,000 a year would see a tax increase of about $2,000. The average federal tax rate, including all taxes, would reach 24.3%, up five percentage points.
After the Nov. 6 election, Congress is scheduled to return to Washington to debate the automatic spending cuts and tax increases that will start in January unless lawmakers act. For calendar year 2013, taxes would increase by $536 billion, or about 20%.
“This is a very large tax increase,” Donald Marron, the center’s director, told reporters in Washington today.
If Congress does nothing, tax rates on income, capital gains, dividends and estates would increase, and the alternative minimum tax would spread to 21.7 million households, up from 4 million this year.
The top statutory tax rate on ordinary income would reach 39.6%, up from 35%, and the top rate on capital gains would be 23.8%, up from 15%. A 2 percentage point payroll tax cut is set to expire at the end of 2012.
The estimated $536 billion tax increase doesn’t include provisions that expired at the end of 2011, including miscellaneous corporate tax breaks. The provision that prevents the alternative minimum tax from expanding expired last year.
Lawmakers agree they should continue the income tax cuts for most households. Republicans want to keep all of the income and estate tax cuts for 2013 and begin overhauling the tax code. They warn about the potential economic effects of tax increases, particularly for business owners who report their profits on individual returns.
“With so much at stake, Democrats should choose leadership over brinkmanship and work with Republicans to stop the president’s small business tax hike” and replace automatic spending cuts with other changes, House Speaker John Boehner, an Ohio Republican, said in a statement today.
Democrats, including President Barack Obama, want to let most of the tax cuts lapse for the top 2% of households, or income exceeding $200,000 a year for individuals and income above $250,000 for married couples.
The political stalemate over what to do about top rates has prevented agreement on everything else.
Each piece of the fiscal cliff has varying effects on people at different income levels. Low-income households have the most at stake in expiring expansions of the child tax credit and earned income tax credit. Middle-income households are affected most by the payroll tax and income tax.
According to the report, households at the top income level are most affected by the income tax and the tax increases on unearned income such as capital gains that were enacted in the 2010 health care law and take effect in January.
“If investors really believe that the tax rate they face on capital gains is about to go up significantly, some of them will choose to realize accumulated gains this year rather than next year,” Marron said.
BROAD TAX IMPACT
About 88% of households would see a tax increase. Those who would avoid it include people who don’t have wage income subject to the payroll tax and who don’t make enough from other income to pay taxes. This group includes low-income senior citizens on Social Security.
The tax changes would take effect at different times throughout 2013. The payroll tax change would reduce paychecks immediately in January. The administration could delay the higher withholding because of the income tax changes, especially if an agreement in Congress seemed likely to occur in January, said Eric Toder, a co-director of the center.
Some of the expanded tax burden wouldn’t be apparent until early 2014, when taxpayers file their returns for 2013.
The Tax Policy Center is a joint project of the Urban Institute and the Brookings Institution.