How Much Would the Fiscal Cliff Raise Taxes?

Roberton William, Eric Toder, Hang Nguyen, and I are out with Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?,  a detailed look at all the tax increases in the looming fiscal cliff. We have two basic messages.

First, the cliff is big, amounting to more than $500 billion in 2013, a 20+ percent increase.

Second, you can’t tell the players without a scorecard. Over the past dozen years, the snowball of temporary tax cuts (and, for 2013, the introduction of some new taxes) has grown to epic proportions. As a result, the cliff isn’t just about the 2001-03 tax cuts that grab most of the headlines. There are also the temporary cut in payroll taxes, the “extenders”, the expanded credits enacted in 2009, the current version of the estate tax, the AMT patch, and the start of new health reform taxes.

To make sense of it all, we had to divvy the pending tax increases up into nine categories. This chart shows how they would affect tax rates for households at different income levels:

(click to enlarge)

Bottom line: People of all incomes will see their tax go up if we go completely over the fiscal cliff. But there are significant differences in which provisions matter most.

Of course, the full paper includes much more. Here’s the abstract:

The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000. Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff. To inform that discussion, this report provides a detailed look at the revenue, distributional, and incentive effects of these increases. Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. Households with low incomes would be particularly affected by the expiration of tax credits expanded or created by the 2009 stimulus. And households with high incomes would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health reform taxes. Taken together, the scheduled changes would significantly increase the marginal tax rates that can influence behavior. Average marginal tax rates would increase by 5 percentage points on labor income, by 7 points on capital gains, and by more than 20 points on dividends.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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