Fiscal Cliff: Overview of the bipartisan tax agreement
On New Year’s Day, Congress passed H.R. 8 “American Taxpayer Relief Act of 2012” to partially avert the “fiscal cliff.”
The “fiscal cliff” refers to the combination of tax increases and steep federal spending cuts that were scheduled to occur on Jan. 1, 2013 unless Congress and the President reaches a trillion dollar deficit reduction deal by Dec. 31, 2012. The non-partisan Congressional Budget Office has warned Congress that going over the “fiscal cliff” will cause a recession in 2013.
At the 11th hour, Vice President Joe Biden and Senate Minority Leader Mitch McConnell were able to hammer out a bipartisan compromise to prevent most of the tax increases from taking effect this year.
The agreement dealt mostly with the 2001 and 2003 Bush tax cuts, which were supposed to be temporary but have been repeatedly extended, adding $3 trillions to the national over the past decade.
An key compromise was to allow the Bush tax cuts to expire for individuals making more than $400,000 a year and couples making more than $450,000 a year, which would generate about $625 billion (or a little more than half a trillion) in additional tax revenue to help pay down the $16 trillion national debt.
Notably, however, the agreement didn’t address the looming $1.2 trillion sequester cuts – or the automatic across-the-board cuts – to defense and non-defense discretionary spending except to postpone the sequestration deadline by another 2 months.
Although H.R. 8 will prevent taxes from going up for most Americans, it comes with a hefty price tag. According to the Joint Committee on Taxation, H.R. 8 is projected to cost the federal government close to $4 trillion over 10 years. The CBO estimated that extending tax cuts and credits in H.R. 8 would add another $3.63 trillion to the federal deficit. The only deficit reduction achieved was the $0.62 trillion in additional tax revenue.
Joint Committee on Taxation’s Estimate of Revenue Losses Resulting from Tax Cuts & Credits Extended by H.R. 8: $3.9 trillion from 2013-2022
Below is a partial list of the tax extensions and their projected costs to the U.S. government:
Permanently extending most of the 2001 and 2003 Bush tax cuts: $1.9 trillion over 10 years
- Extending the Bush tax cut rates for individuals making less than $400,000 a year or couples making more than $450,000 a year would cost $762 billion.
- Extending the estate and gift tax exemptions for properties and inheritances under $5 million and capping the tax rate at 40% would cost nearly $370 billion.
- Extending the child tax credit would cost $354 billion.
- Extending the current dividends (or payments to corporate shareholders) tax rates of 0% to 15% for individuals earning less than $400,000 a year and couples earning less than $450,000 a year would cost $231 billion.
- Extending the current capital gains (or income earned from the buying and selling of properties, stocks, and bonds) tax rate of 0% to 15% for individuals earning less than $400,000 a year and couples earning less than $450,000 a year would cost nearly $59 billion.
- Extending the marriage tax deductions would cost about $85 billion.
- Extending various education tax credits, such as employer-provided educational assistance and student loan interest deduction, would cost $23 billion.
- Extending the dependent care tax credit would cost nearly $1.8 billion.
- Extending the adoption tax credit would cost nearly $5.6 billion
Permanently extending the Alternative Minimum Tax (AMT) exemption for individuals earning less than $50,600 a year or couples earning less than $78,750 a year: $1.8 trillion over 10 years
Temporarily extending several tax credits – such as the American Opportunity Tax Credit – enacted in the 2009 stimulus bill: $129 billion over 10 years
Extending business tax credits and deductions – such as tax credits for research and experimentation expenses, the Work Opportunity Tax Credit (5 years), and employer wage credit for active military reservists: $46 billion over 10 years
Extending renewable energy tax credits – such as tax credits for biofuel and building energy-efficient homes: $18 billion over 10 years
Congressional Budget Office’s Estimate of H.R. 8 Spending Costs:
- Extending the emergency unemployment insurance for 2 million unemployed Americans for 1 year: $30 billion
- Extending the current Medicare physician reimbursement rates (forgoing the “Doc Fix”), thereby preventing a 26.5% cut on payments to health care providers, through Dec. 31, 2013: $17 billion (for just 2012-2013)
White House’s Estimate of Additional Tax Revenues from the Expiration of Bush Tax Cuts for the Wealthy: $625 billion over 10 years
- Individuals and couples with annual incomes exceeding $400,000 and $450,000 respectively will see their tax rate returned to 39.6% instead of 35%.
- Limiting itemized deductions and personal exemptions for individuals making more than $250,000 a year or couples making more than $300,000 a year.
- The dividends tax rate will return to 20% for individuals and couples exceeding the $400,000 and $450,000 annual income threshold. Adding the 3.8% Affordable Care Act surcharge, the effective dividends tax rate for high-income individuals will be 23.8%.
- The capital gains tax rate will return to 20% for individuals and couples with incomes above $400,000 and $450,000 a year respectively. The 3.8% Affordable Care Act surcharge would apply, bringing the effective capital gains tax rate to 23.8% for high-income people.
- WhatTheFolly.com: Fiscal Cliff: Congress approved permanent extension of middle-class tax cuts, tax rates for top 2% to go up
- Congressional Budget Office: Cost estimate for H.R. 8, American Taxpayer Relief Act of 2012
- Joint Committee on Taxation: JCX-1-13 Estimated Revenue Effects Of The Revenue Provisions Contained In An Amendment In The Nature Of A Substitute To H.R. 8, The “American Taxpayer Relief Act Of 2012,” As Passed By The Senate On January 1, 2013
- Thomas.LOC.gov: H.R. 8 “American Taxpayer Relief Act of 2012”
- Senate.gov: Vote #251 H.R. 8 (Job Protection and Recession Prevention Act of 2012 ) – An act entitled the “American Taxpayer Relief Act of 2012”
- Clerk.House.gov: Final Vote Results for Roll Call #659 H.R. 8
- WhatTheFolly.com: Transcript: President Barack Obama’s remarks on the “fiscal cliff” tax deal on Jan. 1, 2013
- WhatTheFolly.com: Transcript: President Barack Obama’s remarks on the “fiscal cliff” negotiations on Dec. 31, 2012
- WhatTheFolly.com: Transcript: Boehner: “I’m disappointed in where we are” on fiscal cliff talks
- WhiteHouse.gov: Fact Sheet: The Tax Agreement: A Victory for Middle-Class Families and the Economy
- WhatTheFolly.com: Overview of the White House’s initial proposal to avert the fiscal cliff
- WhatTheFolly.com: CBO analysis shows ‘fiscal cliff’ will sharply reduce long-term deficits but lead to a recession in 2013
- WhatTheFolly.com: 5 key facts about sequestration
- WhatTheFolly.com: Analysis: Impact of sequestration on non-defense discretionary spending