the fiscal cliff

School of Visual Arts

The Fiscal Cliff


The Fiscal Cliffor

TaxmaggedonThe Fiscal Cliff or Taxmaggedon is the confluence of tax increases summarized in the next

slide caused by among others the expiration of the Bush tax cuts, the 2% Social Security

payroll tax cut, the sequestration mandated by the Budget Control Act, which was

approved as part of the package to increase the debt ceiling to ensure that the U.S. did not

default on its debt and a set of other tax provisions, the largest of which is the Alternative

Minimum Tax fix that has to be renewed annually.


The Fiscal Impact of Policies That Expire or Activate in or After 2012

Cost of Renewal (Fiscal Years)Cost of Renewal (Fiscal Years)Cost of Renewal (Fiscal Years)

2013 2013-2014 2013-2022

2001/2003/2010 Tax Cuts $110 billion $340 billion $2.8 trillion

Alternative Minimum Tax Patches $125 billion $225 billion $1.7 trillion

Jobs Measures $115 billion $150 billion $150 billion

Doc Fixes $10 billion $30 billion $270 billion

The Budget Control Act Sequester $65 billion $160 billion $980 billion

Tax Extenders $30 billion $60 billion $455 billion

TOTAL $455 billion $965 billion $6.355 trillion

Source: Committee for a Responsible Federal Budget

Together, these simultaneous changes amount to $455 billion, for 2013,which would appear to go a long way to closing the budget deficit over time. However, even the most hawkish of the deficit hawks realize that at 3.5% of the Gross Domestic Product, the effect of these sudden increases in taxes and reductions in expenditures will be to decrease growth by at least 3.5%, pushing the economy into negative growth, or a recession.

School of Visual ArtsCost of Renewal (Fiscal Years)Cost of Renewal (Fiscal Years)Cost of Renewal (Fiscal Years)

2013 2013-2014 2013-20222001/2003/2010 Tax Cuts $110 billion $340 billion $2.8 trillion

Expiration of American Opportunity Tax Credit $3 billion $15 billion $125 billion

Reduction of Child Tax Credit from $1,000 to $500 per child $7 billion $40 billion $350 billion

Expiration of Child Tax Credit enhanced refundability $0 billion $10 billion $90 billion

Expiration of EITC expansion $0 billion $10 billion $95 billion

Elimination of 10% bracket $30 billion $80 billion $450 billion

Increase in rates from 25 | 28 | 33 | 35 to 28 | 31 | 36 | 39.6 $40 billion $95 billion $730 billion

Restoration of phased outs for itemized deductions and personal exemtions (Pease and PEP) $6 billion $20 billion $165 billion

Expiration of reductions in marriage penalties $5 billion $10 billion $55 billion

Increase in capital gains taxes from 15% to 20% and dividends taxes from 15% to being taxed as ordinary income $15 billion $25 billion $315 billion

Expiration of various education and other tax benefits $1 billion $5 billion $20 billion

Increase in estate tax from 35% over $5 million to 55% over $1 million $5 billion $35 billion $430 billion

Alternative Minimum Tax Patches $125 billion $225 billion $1.7 trillion

Cost relative to current law $90 billion $130 billion $805 billion

Interaction with extension af 2001/2003/2010 tax cuts $35 billion $100 billion $920 billion

Jobs Measures $115 billion $150 billion $150 billion

Expiration of 2% payroll tax holiday $90 billion ~$120 billion ~$120 billion

Expiration of expanded unemployment benefits $25 billion ~$30 billion ~$30 billion

Doc Fixes $10 billion $30 billion $270 billion

The Budget Control Act Sequester $65 billion $160 billion $980 billion

2% reduction to Medicare providers $5 billion $10 billion $90 billion

Other manditory reductions $5 billion $10 billion $45 billion

10% reduction in defense spending (down 8.5% by 2021) $30 billion $80 billion $510 billion

8% reduction in non-defense discretionary spendong (5.5% by 2021) $25 billion $55 billion $335 billion

Tax Extenders $30 billion $60 billion $455 billion

Subpart F for active financing income $5 billion $10 billion $80 billion

R&E tax credit $5 billion $10 billion $65 billion

Alcohol fuel tax credit $10 billion $10 billion $60 billion

Other extenders $10 billion $30 billion $250 billion

TOTAL $455 billion $965 billion $6.355 trillion

Source: Committee for a Responsible Federal Budget

Although it is possible that something will happen to ameliorate the situation, it is not clear what. Much of the political discourse centers on the idea that tax rates are already as high as they should be so they should not be increased except for the very wealthy or alternatively tax rates should be decreased, the tax base broadened so that overall tax collection remains the same.

The Fiscal Impact of Policies That Expire or Activate in or After 2012

2009 Corporate Income Taxes as a Percentage of GDP

NorwayLuxembourg

KoreaCzech Republic

SwitzerlandNew Zealand

ItalySweden

Slovak RepublicUnited Kingdom

IsraelBelgiumCanadaIreland

DenmarkJapan

HungarySpain

FinlandTurkey

SloveniaAustriaFrance

GermanyUnited States

Iceland2% 4% 6% 8% 10%


Source: thinkprogress.org

But are taxes too high?Although the top U.S. corporate rates are higher than our industrial competitors, very few corporations pay those rates as can be seen in this chart, which shows corporate taxes as a percentage of the Gross Domestic Product (GDP).

As you can see only Iceland has a lower effective tax rate. In other words, although the nominal U.S. tax rate may be higher than the rest of the industrialized world, U.S. loopholes are so large that U.S. corporations pay far less in taxes than do their foreign competitors.

Even in a notorious tax haven like Luxembourg, corporations pay 3 times the effective tax rate that they do in the US.

Total 2009 Taxes as a Percentage of GDP

DenmarkSweden

ItalyBelgiumFinlandAustriaFrance

NorwayHungarySlovenia

LuxembourgGermany

Czech RepublicUnited Kingdom

IcelandIsrael

CanadaNew Zealand

SpainSwitzerland

GreeceSlovak Republic

IrelandKorea

TurkeyUnited States

ChileMexico

10% 20% 30% 40% 50%


Source: thinkprogress.org

This chart shows total taxes paid—federal, state and local—by individuals as a percentage of Gross Domestic Product.

Only the citizens of Chile and Mexico are less heavily taxed than U.S. citizens are.

Top U.S. Federal Income Tax Rates on Regular Income and Capital Gains


0%

20%

40%

60%

80%

100%

1916 1926 1936 1946 1956 1966 1976 1986 2006 2012

Top Tax Rate on Regular Income

Top Tax Rate on Capital Gains

Source: data360.org

This chart gives an historical perspective on the top tax rates on personal income and capital gains from 1916 through today. As you can see, by historical standards, tax rates are low today.


0%

20%

40%

60%

80%

100%

1916 1926 1936 1946 1956 1966 1976 1986 2006 2012



Income Tax During World War I

Source: data360.org

You can see how tax rates spike during the First World War and again during the Second World War, where the highest marginal rate in 1944 was 94%.

Top U.S. Federal Income Tax Rates on Regular Income and Capital Gains


0%

20%

40%

60%

80%

100%

1916 1926 1936 1946 1956 1966 1976 1986 2006 2012




94% in 1944

Source: data360.org

Top U.S. Federal Income Tax Rates on Regular Income and Capital GainsThat rate was deliberately enacted by the Roosevelt Administration to ensure that there were no "war millionaires." The rate applied to income above $200,000 about $2,000,000 today.


0%

20%

40%

60%

80%

100%

1916 1926 1936 1946 1956 1966 1976 1986 2006 2012




94% in 1944 Income Tax During Korean War

91% in 1952-60Under President Eisenhower

Income Tax During Vietnam War

Income Tax During Iraq War

Source: data360.org

Top U.S. Federal Income Tax Rates on Regular Income and Capital GainsRates fell briefly after World War II and then were raised during the Korean War, and held steady during President Eisenhower's terms, a period of sustained economic growth, were reduced slightly under President Kennedy and then reduced again by President Johnson as we went into the Vietnam War.

Johnson set the precedent for not paying for a war by cutting taxes, which George W. Bush’s Administration followed by cutting taxes after the Afghanistan and Iraq invasions.


0%

20%

40%

60%

80%

100%

1916 1926 1936 1946 1956 1966 1976 1986 2006 2012


Top Tax Rate on Capital Gains1929 2008

Source: data360.org

Top U.S. Federal Income Tax Rates on Regular Income and Capital GainsOne final thing to notice is that the Capital Gains Rate has fallen below 20% twice. In both those cases, those cuts were soon followed by a financial panic as in 1929 and 2008.


0%

10%

20%

30%

40%

50%

60%

1950 1958 1966 1974 1982 1990 1998 2006

Share of Federal Tax Revenue

Individual Income Taxes

Payroll Taxes

Corporate Income Taxes

Source: Office of Management and Budget; Historical Tables; Budget of the U.S. Government, Fiscal Year 2012 and Staff of the Joint Committee on Taxation Calculations.

Here we see that from 1950 through 2006, the share of government revenue paid by corporations fell from 30% to 10% while the share of federal revenue coming from payroll tax has increase from 10% to 40%. In other words, taxes on income—which were 50% of government receipts in 1950—are now 80% of government revenues.

Since the tax rates on the highest incomes have fallen and the tax rates on earned income (Social Security) have risen, it is not surprising that many of those who work for a living may feel overtaxed.


2012 Tax Rates

10% on taxable income from $0 to $17,400, plus

15% on taxable income over $17,400 to $70,700, plus




35% on taxable income over $388,350

Source: about.com

Here is a summary of the individual tax rates that are in effect now.


2013 Tax Rates (if nothing happens)

15% on taxable income not over $59,300

28% on taxable income over $59,300 but not over $143,350



39.6% on taxable income over $390,050

Source: about.com

This is what the tax rates will look like if Congress does nothing.


Current Tax RatesTaxable Income

Income Tax

10% $0 – $17,400 $17,400 $1,740

15% $17,400 – $70,700 $70,700 $9,735

25% $70,700 – $142,700 $142,700 $27,735

28% $142,700 – $217,450 $217,450 $48,665

33% $217,450 – $388,350 $388,350 $105,062

35% over $388,350

This is what the taxes are at the current rates for people at the top of each tax bracket.


2013 Tax RatesTaxable Income

Income Tax

15% $0 – $59,300 $17,400 $2,610

28% $59,300 – $143,350 $70,700 $12,087

31% $143,350 – $218,450 $142,700 $33,087

36% $218,450 – $390,050 $217,450 $55,395.50

39.6% over $390,050 $388,350 $116,916

This slide shows what happens to people of the same income if the tax brackets change.


2012 Taxes

$1,740

$9,735

$27,735

$48,665

$105,062

% Difference

50%

24.16%

19.3%

13.83%

11.28%

2013 Tax RatesTaxable Income

Income Tax

15% $0 – $59,300 $17,400 $2,610

28% $59,300 – $143,350 $70,700 $12,087

31% $143,350 – $218,450 $142,700 $33,087

36% $218,450 – $390,050 $217,450 $55,395.50

39.6% over $390,050 $388,350 $116,916

Difference

$870

$2,352

$5,352

$6,730.50

$11,854

This slide shows the difference in dollars and percentage.

You'll note that the percentage increase declines as income increases. This is generally described as regressive taxation.


Discretionary Outlays vs. Tax Expenditure Estimates in Constant Dollars ($ Billions)

0

300

600

900

1200

1500

1985 1991 1997 2003 2009

Total Discretionary Outlays

Sum of Tax Expenditure Estimates

Source: subsidyscope.org

To prevent tax rates from going up, some are urging that the tax base be broadened by eliminating tax preference items, deductions, credits and exclusions that are commonly called “tax expenditures.”

As you can see from this chart these preference items are quite large, estimated to be almost a trillion dollars in foregone revenue in 2009. But many of these preferences are actually quite popular, as the next chart will show you.


Largest Tax Expenditures in FY 2011, in Billions of DollarsLargest Tax Expenditures in FY 2011, in Billions of Dollars

Provision Amount

Exclusion for employer-sponsored health insurance $177

Mortgage interest deduction $104.5

401 (k) plans $67.1

Deduction for state and local taxes other than property taxes $46.5

Step-up basis of capital gains at death $44.5

Lower rate on capital gains $44.3

Charitable deduction (other than education and health) $43.9

Pensions (defined benefit) $44.6

Exclusion of net imputed rental income $37.6

Capital gains exclusion on home sales $31.3

Source: U.S. Budget Analytical Perspectives, Fiscal Year, 2011

The two largest are the exclusion for employer-sponsored health insurance and the mortgage interest deduction.


Number of Tax Returns (thousands) by Marginal Statutory Tax Rate in 2011

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0% 10% 15% 25% 28% 33% 35%

8691,5374,628

24,380

49,945

26,295

58,935

Source: Joint Committee on Taxation

This chart shows the marginal rates of all those who filed tax returns in 2011. The question to ask is if we broaden the base, who pays more taxes and how much more? The 58,935,000 who paid no income tax or the 869,000 who were in the 35% bracket?


$0

$3,750

$7,500

$11,250

$15,000

2010 2011

Actual Cost per Employee for 2010 and 2011

Paid by SVA, $10,000

I want to give you an example of how “broadening the base” might affect you:

In this example, to “broaden the base” means eliminating the exclusion on employer paid health care plans, (in other word, the health benefits paid by SVA on your behalf would become part of your taxable income).

The example assumes that tax rates are kept at 2012 levels.This is what SVA pays on everyone's behalf for health care every year.



Income Tax

10% $0 – $17,400 $17,400 $1,740

15% $17,400 – $70,700 $70,700 $9,735

25% $70,700 – $142,700 $142,700 $27,735

28% $142,700 – $217,450 $217,450 $48,665

33% $217,450 – $388,350 $388,350 $105,062

35% over $388,350

This would be everyone's new taxable income at the old rates



Income Tax

Imputed Income Healthcare

10% $0 – $17,400 $17,400 $1,740 $10,000

15% $17,400 – $70,700 $70,700 $9,735 $10,000

25% $70,700 – $142,700 $142,700 $27,735 $10,000

28% $142,700 – $217,450 $217,450 $48,665 $10,000

33% $217,450 – $388,350 $388,350 $105,062 $10,000

35% over $388,350

The Imputed Income Healthcare shows what would be added to each employee's taxable income.



Income Tax


New Taxable Income

10% $0 – $17,400 $17,400 $1,740 $10,000 $27,400

15% $17,400 – $70,700 $70,700 $9,735 $10,000 $80,700

25% $70,700 – $142,700 $142,700 $27,735 $10,000 $152,700

28% $142,700 – $217,450 $217,450 $48,665 $10,000 $227,450

33% $217,450 – $388,350 $388,350 $105,062 $10,000 $398,350

35% over $388,350

This shows your new taxable income.



Income Tax


New Taxable Income

New Income Tax

10% $0 – $17,400 $17,400 $1,740 $10,000 $27,400 $3,240

15% $17,400 – $70,700 $70,700 $9,735 $10,000 $80,700 $12,235

25% $70,700 – $142,700 $142,700 $27,735 $10,000 $152,700 $30,535

28% $142,700 – $217,450 $217,450 $48,665 $10,000 $227,450 $51,965

33% $217,450 – $388,350 $388,350 $105,062 $10,000 $398,350 $108,562

35% over $388,350

This would be your new income tax.



Income Tax


New Taxable Income

New Income Tax

Increased Tax

Percentage Increase

10% $0 – $17,400 $17,400 $1,740 $10,000 $27,400 $3,240 $1,500 86.21%

15% $17,400 – $70,700 $70,700 $9,735 $10,000 $80,700 $12,235 $2,500 25.68%

25% $70,700 – $142,700 $142,700 $27,735 $10,000 $152,700 $30,535 $2,800 10.1%

28% $142,700 – $217,450 $217,450 $48,665 $10,000 $227,450 $51,965 $3,300 6.78%

33% $217,450 – $388,350 $388,350 $105,062 $10,000 $398,350 $108,562 $3,500 3.33%

35% over $388,350

This shows the increase in dollars and percentage.


2012 Tax Rates

$1,740

$9,735

$27,735

$48,665

$105,062

2013 Tax Rates

$2,610

$12,087

$33,087

$55,395.50

$116,916

2012 Tax Rates plus Medical Expenses

$3,240

$12,235

$30,535

$51,965

$108,562

You can decide whether this current exemption for employer provided health care benefits is a “tax expenditure” worth keeping.

And, whatever your conclusion, I would suggest that you let your elected representatives know what you have concluded.

the fiscal cliff

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