How the Fiscal Cliff Falls Upon All of the Rich and the Poor

by Patrick Brennan

As Douglas Holtz-Eakin notes below, under current law, President Obama’s administration faces, starting on January 1, 2013, dramatic tax hikes and more-gradual spending cuts over time, colloquially known as the “fiscal cliff.” Much of the deficit reduction achieved would come through the tax hikes involved, so how much would the expiring rates and provisions cost?  About half a trillion dollars next year, apparently.

Assuming you’ve gotten past blaming the Tax Policy Center for losing the election for Mitt Romney with its analysis of his tax plan, they have a report out assembling all of the tax increases the fiscal cliff entails at the beginning of 2013. The current increase adds up to a mean increase per household of $3,500 in taxes paid. A few key charts show who’s going to bear the burden of reducing the deficit so dramatically with tax increases. First, each quintile’s tax rate with the cliff’s expected increase in yellow:

Breaking down the percentage-point increase in those average rates:

And the details of what each group is going to pay in increased taxes:

As you can see, we’re talking about significant amounts of money and significant rate increases for basically every group (an indication of the plethora of tax hikes schedule for 2013, if nothing else), though the net effect would be an even more progressive system than we have now.

Now, most of these tax increases are not likely to come to pass, but it is possible that, with the president insisting on tax increases for high-income earners and the Republican House completely refusing to allow such a move, that we could “go over the fiscal cliff,” and see these effects begin to take hold in January. But it’s important to note that, while sucking this much money out of the economy would almost certainly be very contractionary, this effect wouldn’t necessarily be that damaging over the course of a month or two, by which point on assumes a real tax deal is struck to reduce most of the rates back to 2012 levels. The tax rates could then be backdated and refunds issued; some congressional Republicans have also floated the idea of ordering the IRS to fiddle with withholding schedules so that the tax-rate increases actually would have almost no immediate effect at all.

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