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Tax Policy Center Analyzes "Fiscal Cliff" Impacts on Taxpayers

Going over the "Fiscal Cliff" Means Significantly Higher Tax Bills for Americans of All Incomes

Urban Institute

Published: October 01, 2012
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Abstract

The fiscal cliff would increase Americans’ taxes by more than $500 billion in 2013, or almost $3,500 per household. A typical middle-income household would see its taxes go up roughly $2,000. Using the Tax Policy Center’s microsimulation model of the U.S. tax system, the authors examine in detail how the tax changes in the fiscal cliff would affect taxpayers at different income levels.


Contact:
Matthew Johnson, (202) 261-5723, mjohnson@urban.org
Stu Kantor, (202) 261-5283, skantor@urban.org

WASHINGTON, D.C., October 1, 2012 -- The Tax Policy Center (TPC), a joint venture between the Urban Institute and the Brookings Institution, released an analysis of the looming “fiscal cliff.” The report documents how, barring legislative action, taxes will jump for nearly 90 percent of Americans on January 1.

In the report, "Toppling Off the Fiscal Cliff: Whose Taxes Will Rise and How Much?," Urban Institute authors Roberton Williams, Eric Toder, Donald Marron, and Hang Nguyen estimate that the fiscal cliff would increase Americans’ taxes by more than $500 billion in 2013, or almost $3,500 per household. A typical middle-income household would see its taxes go up roughly $2,000.

The researchers then look behind those numbers, analyzing the nine distinct tax increases in the fiscal cliff.

“The tax provisions in the fiscal cliff are not created equal,” said the Urban Institute’s Donald Marron, director of the Tax Policy Center. “They have varying effects on households of different income levels and face quite different political prospects. Congress will almost certainly prevent some from happening, such as the expansion of the alternative minimum tax to 20 million more families, while allowing others to happen. As the debate heats up, policymakers and citizens should focus not only on the overall cliff, but the important distinctions among its components.”

Using TPC’s microsimulation model of the U.S. tax system, the authors examine in detail how the tax changes in the fiscal cliff would affect taxpayers at different income levels.

  • Upper-income taxpayers would experience the largest tax increases, both in absolute terms and as a percentage of income. Households in the top 1 percent of the income distribution would see an average tax increase of more than $120,000, with their overall federal tax rate rising from 31.2 percent to 38.4 percent. Those tax increases would primarily reflect the expiration of the Bush-era tax cuts on ordinary income, capital gains, and dividends that President Obama has proposed allowing to expire and, to a lesser extent, the new health reform taxes.
  • Middle-income taxpayers would also face substantial tax increases. Households in the middle income quintile (between the 40th and 60th percentiles) would pay an additional $2,000, with their overall federal tax rate rising from 14.0 percent to 17.8 percent. Those tax increases would primarily reflect the expiration of the Bush-era tax cuts that apply to low and middle incomes and the expiration of the temporary cut in Social Security payroll taxes.
  • Low-income taxpayers would also experience substantial tax increases. The average household in the lowest income quintile would pay about $400 more tax and its overall federal tax rate would jump from 0.6 percent to 4.3 percent. Those tax increases would primarily reflect the expiration of three tax credits created or expanded by the 2009 stimulus law and the expiration of the temporary payroll tax cut.

The charts below illustrate the impacts by income level.

Among the tax components analyzed in the report are the Bush-era tax cuts, the alternative minimum tax patch, the payroll tax cut, new taxes enacted in the 2010 health care law, tax credits included in the 2009 stimulus law, and dozens of short-term tax breaks that Congress regularly extends. The separate provisions and different combinations of provisions would have very different effects in total and across income groups. In all, tax revenues would increase by about $535 billion under a fiscal cliff scenario. Of course, Congress and the White House could choose to delay, repeal, or offset some of the scheduled tax increases and allow others to happen.

“No matter who wins in November, the country has to face the issue of looming tax increases,” noted Roberton Williams, a senior fellow at the Urban Institute. “Our analysis is intended to help policymakers and ordinary citizens understand how these tax increases will hit at the taxpayer level. In the short term, we need to discuss how to reduce the deficit without harming our still-weak economy; in the longer term, we need a permanent tax code that is simpler, fairer, and less intrusive on economic activity.”

The full report can be accessed at the Tax Policy Center’s website, which is also accessible through www.urban.org.

Average Federal Tax Rate by Cash Income Percentile, 2013

Change in Average Federal Tax Rate by Cash Income Percentile, 2013

The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance challenges facing the nation. It provides information, analyses, and perspectives to public and private decisionmakers to help them address these problems and strives to deepen citizens’ understanding of the issues and trade-offs that policymakers face.