The Year in Taxes: From the Fiscal Cliff to Tax Reform Talks

The year in taxes started with the nation toppling, briefly, over the fiscal cliff. And it ended with some interesting policy proposals on tax reform though little political progress.

Remember the fiscal cliff? While that crisis was resolved on New Year’s Day, it really began in 2001, when President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The big tax reductions in that law were originally slated to expire by or before the end of 2010. After various extensions, they were to expire at the end of 2012, along with a variety of other temporary tax cuts related to the payroll tax, the alternative minimum tax, and tax benefits for workers and families with children.

President Obama wanted to extend EGTRRA’s middle-class tax cuts but vowed to let income tax cuts for the top two brackets to expire. Most Republicans had signed the No New Taxes pledge and wanted to extend all the Bush tax cuts though they were willing to let the payroll tax cut and other economic stimulus provisions expire. The looming expirations led to last winter’s fiscal cliff

In the end, Congress did not approve an extension of most of the tax cuts until late on New Year’s Day. Because all the Bush tax cuts had technically expired, Republicans could say they had not violated their No New Taxes pledge. After all, now they were cutting taxes for most people. President Obama signed the American Taxpayer Relief Act of 2012 (ATRA) on January 2, 2013. The law included:

• An increase in the individual marginal tax rate from 35 percent to 39.6 percent for individuals with taxable income over $400,000 and for couples over $450,000.
• An increase in the rate on long-term capital gains and qualified dividends from 15 to 20 percent for high-income taxpayers.
• A permanent increase of the AMT exemption amount to $50,600 in 2012 for individuals and $78,750 for married taxpayers filing jointly, with indexing of the AMT for inflation.
• A higher effective estate and gift tax exemption in 2011, indexed for inflation, with a marginal estate tax rate of 40 percent.
• Permanent extension of tax benefits for having children, education, being married.
• Repeal of the phase-out of personal exemptions and limits on itemized deductions for individuals with income over $250,000 and couples with income over $300,000.
• Extension through 2017 of expansion of the EITC, increased refundability of the child tax credit, and the American Opportunity tax credit (for college expenses), all of which were part of the 2009 economic stimulus act.

ATRA did not extend the 2 percent of wages payroll tax cut that had been in effect in 2011 and 2012.

Although ATRA is described usually as a tax increase, the R in ATRA actually stands for “relief” that is, a tax cut. The confusion arises because there were so many expiring provisions at the end of 2012. ATRA could be described as either a $618 billion tax increase (relative to maintenance of all of the provisions that had been in place – that is, relative to so-called “current policy”) or a $4 trillion tax cut (relative to the actual law -- the R in ATRA stands for “Relief.”)

Compared to current policy, the act increased taxes on high income taxpayers. The distributional effects of ATRA affected largely those in the top 1 percent . They saw an average federal tax increase of more than $50,000 (about 3 percentage points increase in their average tax rate) while those in the top 0.1 percent faced an average increase of about $320,000 (equal to about a 4 percentage point average rate increase).

The rest of the year was quieter, but saw discussion on tax reform. Ways and Means Committee chair David Camp (R-MI) issued a number of working papers on the taxation of corporate and non-corporate businesses, territorial taxation, and the taxation of financial products. While Camp had said he wanted to introduce a tax reform bill in 2013, he never did.

In November, Senate Finance Committee chair Max Baucus (D-MT) laid out his ideas for reforming the corporate tax code, both domestically and internationally. However, Baucus has not said when his committee would consider the measure.

Although Camp and Baucus do not appear to have reached agreement on how much revenue should be raised or on how to raise it, the two leaders have nonetheless raised some interesting ideas. But the sorry state of tax reform can probably best be summed up by a small business owner who attended the New Jersey stop of a listening tour that the two chairmen held last summer. She urged the two leaders to “get rid of the deductions that don’t affect me.” As long as that attitude prevails, meaningful tax reform will not happen.