Households making between $200,000 and $500,000 saved the most compared to a world where we went off the cliff forever
Congratulations, if you're reading this, you survived the fiscal cliff. To celebrate the occasion, Congress is giving all of us a tax hike -- though not as big a tax hike as we would have otherwise gotten. Happy New Year?
There's a lot not to like about the fiscal cliff deal, but the biggest thing not to like is the expiring payroll tax cut. As you can see in the chart below, from the Tax Policy Center, it lowers everybody's after-tax income by at least 1 percent, despite the bottom 99 percent of the Bush tax cuts getting renewed and rebranded as the Obama tax cuts.
There are three big tax stories here, all adding up to modest tax increases for the bottom 99 percent, and much bigger tax increases for the top 1 percent.
(1) Five-year extension of the stimulus tax credits. The 2009 stimulus expanded the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit, and the 2012 fiscal cliff deal extended all of them for an additional five years. These credits subsidize low-income households, particularly those with children or people enrolled in postsecondary school, and they're all partially refundable, meaning households can receive them even if their tax liability is zero -- which is why they're such a big deal to households earning $20,000 and less. It's a safety net done the way conservatives like it, since households have to work to get these credits.
(2) Expiration of the payroll tax cut holiday. The worker's half of the payroll tax had been cut two full percentage points, from 6.2 to 4.2 percent, the past two years. Now that's over. As I mentioned above, that's why everybody will take home less money in 2013 than in 2012, though it's not as big a deal for households making $200,000 and over since the payroll tax is only paid on the first $110,100 of income.
(3) Return of Clinton-era rates (or more) for income over $400,000/$450,000. The top marginal rate went back to 39.6 percent for income over $400,000 for singles or $450,000 for couples. Remember, this is a marginal rate, so the more income you have above the threshold, the harder the higher rate hits you, which you can see in the much smaller tax increase for households making half to a million dollars compared to those making more. The deal also brought back limits on deductions and exemptions for high-earners, known as Pease and PEP, for income of individual/joint filers over $250,000/$300,000 and $375,000/$425,000, respectively. But taxes are higher than they were under Clinton when it comes to capital gains and dividends -- rates rise from 15 to 23.8 percent, with the last 3.8 percent due to the Obamacare surtax, for individual/joint filers making $400,000/$450,000. Remember, the top 0.1 percent of households account for half of all capital gains, so this is no small thing.
But as much as the fiscal cliff deal raises taxes on us all, it's not nearly as much as taxes would have gone up if we had gone over the cliff for good -- even for households making making a million dollars or more. The chart below, also from the Tax Policy Center, shows how much bigger after-tax incomes will be in our world with this deal versus a world with no deal. HENRYs (high-earner-not-rich-yet) should buy a late Christmas gift for Congress.
The big winners of the fiscal cliff deal are households making between $200,000 and $500,000 a year. They mostly avoided marginal tax increases, because the threshold for higher rates was set at $400,000/$450,000, instead of the $200,000/$250,000 President Obama originally wanted, and they mostly avoided additional Alternative Minimum Tax (AMT) liability, because Congress permanently patched it. Of course, these changes helped others too, just not quite as much. The AMT patch significantly lowered tax liabilities for six-figure households making less than $200,000, and redefining "middle-class" as income less than $400,000/$450,000 saved households making more than that from paying higher marginal rates on income between $200,000/$250,000 and $400,000/$450,000.
In other words, it wasn't as bad as it could have been, which is enough to give this deal a passing grade. But don't worry, things will be as bad as they can be when House Republicans try to force us into voluntary default again in a few months.
It's cliffs all the way down.
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Matthew O'Brien is a former senior associate editor at The Atlantic.