Brace for a big dose of tax nostalgia. When we fly off the fiscal cliff Tuesday (unless the optimists prove correct, and the obstinate suddenly become dealmakers), we may have to rethink our metaphors. Are we really plunging into the economic abyss, or just stepping into Mr. Peabody’s Wayback Machine? As they say in Washington, nothing up my sleeve.
All the bickering in the Capitol this weekend is about how to avoid the automatic calamity of going back to the way taxes used to be, long ago in the Bush II administration. The political terror will occur when Americans are suddenly and starkly reminded how much money the government has not been taking from them. It’s a lot. A “big deal” is how one Washington think tank put it, being prone to technical jargon.
Here’s what will happen next week, barring a miracle plague of common sense among our political representatives: All the many tax cuts passed since 2001 will expire, including the Bush-era income tax cuts and the Obama-era payroll tax “holiday.” In addition, $100 billion in across-the-board spending cuts, called “the sequestration” will hit Jan. 2, and that includes defense. Doing this horrible stuff all at once, when the economy is weak, is what brought the off-the-cliff metaphor. Remember, it was part of a deal hatched by the so-called supercommittee that was supposed to cut a deal to trim budget deficits, but couldn’t. The consequences of this uncutting and budget busting was supposed to be so universally appalling that lawmakers would do anything to see it didn’t happen. Apparently, it isn’t horrible enough. If there’s no deal, Democrats will console themselves with polls showing we all blame the Republicans. Republicans will think that … well, I’m not sure Republicans do much thinking, but if they do, it might be something like, we showed ’em, we didn’t vote for a tax hike.
And because of the artful blamers and not-ever types, your taxes will be hiked, a lot. Or, if you prefer, they will be restored.
How much? About $500 billion in 2013 alone, according to the Tax Policy Center. That’s a 20-percent rise in federal revenue. For the average family, people like you and me, it will be nearly a $2,000 hit. First, all the income tax rates will rise — 25 percent to 28, 28 to to 31, 33 to 36, etc. A lot of moderately well off people will be thrust into the Alternative Minimum Tax, which they had been pushed out of with a “patch.” Child tax credits will be cut in half. Taxes on capital gains and dividends will rise. Estate taxes will spike, etc.
This won’t be just for rich people. Regardless of any budget deal, the payroll tax cut we’ve enjoyed these many months is due to expire and no one seems excited about renewing it, for it funds Social Security and other important things. So the 2-percentage point cut is coming back, and that will come right out of your paycheck. For the average worker it will be about $80 a month. In addition, extended unemployment benefits may not be extended again. Even those without jobs will join us at cliffside.
Economists do not see this as good. Being so suddenly unstimulated, all those hundreds of billions out of circulation, family budgets battered, less money to spend, less money to buy and invest, it will all have an effect on an economy already weak as a kitten. There’s a metaphor for you. We’re giving up kicking the can down the road to throw a kitten off a cliff.
People on the right are already suggesting that greedy Democrats really want this to happen, because they want your money. People on the left are saying that Republicans are paralyzed by their anti-tax fanatics.
If it happens, blame whomever you want. Then next year, take a look at your pay stub. Set it for 2001, Sherman.
Tracy Warner’s column appears Thursdays and Fridays. He can be reached at email@example.com or 665-1163.