When Congress recently passed the American Taxpayer Rielief Act (ATRA), they kept in place the Bush-era tax policies for families with taxable income below $450,000 and single filers with taxable income below $400,000. It also kept certain expanded tax credits—some refundable—from the 2009 stimulus and “patched” the alternative minimum tax (AMT) to keep it from raising taxes on middle-class families.
One positive of the deal is that Congress made these policies permanent. No longer will Congress have to scramble to extend policies whose expiration would raise taxes on American families and slow the still-ailing economy.
Unfortunately the permanence that the deal provided also applies to the tax policies that Congress failed to extend. By not extending the policies, the following permanent tax increases occurred:
Payroll tax – This is the largest tax increase that resulted from the fiscal cliff deal. The payroll tax cut reduced the Social Security portion of the payroll tax from 6.2 percent to 4.2 percent for workers in 2011 and 2012. Its expiration will raise revenues by more than $1.6 trillion over the next 10 years, primarily from middle-class families.
Top marginal income tax rate – The fiscal cliff deal allowed the top marginal income tax rate to rise to 39.6 percent from 35 percent for families with taxable income over $450,000 and single filers with taxable income over $400,000. This tax increase will fall heavily on small businesses and investors. Higher taxes on these job creators will lessen their incentive to take risks that would have created new jobs.
Effective marginal tax rates – The fiscal cliff deal raised effective marginal tax rates by allowing the reinstitution of the Personal Exemption Phase-out (PEP) and the phase down of itemized deductions (known as the “Pease” provision). Both provisions begin at $250,000 of adjusted gross income (AGI) for singles and $300,000 for families.
Tax increase on investment – Higher tax rates on capital gains and dividends increase the tax bias against investment. The fiscal cliff deal allowed these tax rates to increase from 15 percent to 20 percent.
This is also the first time that a payroll tax applies to investment income—which sets a dangerous precedent. The total rate on capital gains and dividends therefore rose from 15 percent to 23.8 percent, a 59 percent increase in the tax rate. This large increase will lower investment across the economy. Less investment will reduce capital formation, which means that businesses will create fewer jobs and pay their workers less.
Death tax – The fiscal cliff deal allowed the death tax rate to rise from 35 percent to 40 percent but, in a small consolation to grieving families, kept the exemption amount above $5 million ($10 million for married couples) and indexed it for inflation. A higher death tax, like higher capital gains and dividends taxes, represents a tax increase on capital which will result in the same negative effect on jobs.
Expensing tax – In 2011 and 2012, all businesses could expense, or immediately deduct from income, the full cost of new capital expenditures. Congress allowed expensing to lapse, which will raise the cost of capital and slow job creation.
