The Corner

Congress Just Raised Taxes on Most Americans

Last night, the House finally approved what is known as the “American Taxpayer Relief Act” — a curious name for a bill that effectively raises taxes on most Americans in a pretty substantial way.

The Tax Policy Center has the numbers: Thanks mostly to the expiration of the payroll-tax cut, taxes are going up on 77 percent of Americans relative to what they paid in 2012, with the mean increase amounting to $1,635. (Just 0.1 percent of Americans are getting a tax cut relative to their 2012 taxes, and almost all of them are in the top 5 percent of the income distribution — that gilded group that earns income above the Social Security wage base, but doesn’t earn over $450,000 and therefore won’t face higher rates on the top end, either). Here’s the breakdown of who’s seeing how much of a tax increase, by quintiles:

Via Matt Yglesias, Credit Suisse has a slightly clearer illustration of how Americans’ incomes will be affected this year:

Essentially all of these tax increases result from the fact that the payroll-tax cut expires this year, increasing almost every employee’s Social Security tax rate from 4.2 percent to 6.2 percent. I had an NRO piece about this on Monday, and there are two crucial points: That policy change itself is a regressive tax increase (since earnings above about $100,000 aren’t subject to it), and it’s predicted to shave about half a percentage point off of economic growth this year.

Further, as I explained:

Throughout budget negotiations, the president has called for a balanced approach, by which he usually means tax increases on the rich commensurate with the spending cuts Republicans would like. But under his plan, in 2013, about half of the tax increases will fall on the rich (the 1 percent or the 2 percent, depending on what deal is struck), and about half of the extra revenue will come from increased payroll taxes — that is, from the incomes of 100 percent of Americans, and disproportionately from the poor and the middle class.

The TPC now has the numbers to back that up: Thirty-five percent of the additional revenue raised in 2013, combining the tax increases on the rich with the payroll-tax increase, will come from the bottom 80 percent of Americans, who make about 50 percent of the income in the U.S. Just over half the revenue will come from Americans making under $200,000 per year, the bottom 95 percent:

At no point throughout the negotiations for the deal we reached did the White House or congressional Republicans suggest that they would like to see the tax cut extended for a year, despite the fact that the former knows it was effective Keynesian stimulus and the latter has made an economic philosophy out of prizing tax cuts. Put another way: Republicans made their priority preventing tax increases on these people, while President Obama and Democrats were eager to increase taxes on these people — and neither did anything about the fact that taxes went up on these people.

Thanks to our politicians’ fecklessness, taxes are going up on most Americans to support an accounting fiction (the Social Security trust fund), slightly narrowing a deficit that doesn’t need to be and won’t be closed in the next year or two, when the U.S. economy is still stumbling along and Americans’ pre-tax paychecks are stagnating. The one-year extension (and maybe phase-out in 2014 if solid growth returned toward the end of this year) we needed? Corporate America got that for its prized accelerated-depreciation bonus.

A final point about the deal, and the suggestion that it “expands the deficit”: Technically, at 12 a.m. on January 1, all of the Bush tax cuts expired, and therefore, the bill the House and the Senate just passed was a huge tax cut relative to “current law,” and essentially, “current policy,” too (though for whatever reason, the Tax Policy Center’s assessment seems to assume ”current policy” is 2012’s tax rates). Since, yes, tax cuts reduce revenue, that’s the source of the CBO’s statement that the fiscal-cliff deal massively increases the deficit — by about $3.6 trillion over the next ten years. That increase in the deficit is entirely due to forgone tax revenue which almost everyone in Congress agreed shouldn’t be collected (there’s also, though, $30 billion over two years in unemployment-benefits extensions, a real spending increase, and the meaningless spending increase associated with the doc fix, essentially the spending version of the tax hikes that were never going to happen). The deal only increases the deficit inasmuch as it doesn’t raise taxes a spectacular amount — not exactly the kind of deficit expansion conservatives should spend much time complaining about.

UPDATE: This post has been amended to fix a mistake of mine in the pie chart, which originally overstated the share of 2013′s tax increases that will be borne by the middle class; I was using a TPC table with the wrong baseline.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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