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How To Easily Prevent The ‘Fiscal Cliff’ From Hurting Middle Class Families

By Travis Waldron on October 2, 2012 at 11:55 am

"How To Easily Prevent The ‘Fiscal Cliff’ From Hurting Middle Class Families"

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If the United States hits the so-called “fiscal cliff” — the scheduled year-end spending cuts and tax increases — nearly 90 percent of Americans would see their taxes rise, according to a report released Monday. Thanks to an array of expiring tax provisions, middle-income families would see a $2,000 increase, according to the Tax Policy Center report.

The majority of increases on the middle class would come from the expiration of the middle-income Bush tax cuts, the payroll tax cut extension, and the failure to patch the Alternative Minimum Tax. But if those provisions, most of which have bipartisan support in Congress, were extended, the majority of the remaining increases would hit only the wealthiest Americans, as this chart from the TPC report shows:

Both Democrats and Republicans agree that the middle-income Bush tax cuts (the area in orange) should be extended, but Republicans blocked such an extension earlier this year because Democrats did not include an extension of the high-income cuts. The AMT is traditionally patched to prevent higher taxes on the middle class. Only the payroll tax cut is unlikely to be extended again, according to recent reports, and though it would hit working families, it was a stimulus measure meant to expire eventually anyway.

If other tax credits that were expanded by the 2009 stimulus act — the Child Tax Credit, American Opportunity Tax Credit, and Earned Income Tax Credit — were temporarily extended, the burden on low- and middle-income earners would be even smaller (Republicans also opposed the extension of those credits while pushing for a full extension of the Bush cuts.)

As the chart shows, though, the other tax provisions would mostly hit the wealthy. The high-income Bush tax cuts, cuts to the capital gains rate and other investment taxes, the estate tax cut, and taxes meant to pay for Obama’s health care reform law would all hit the richest taxpayers while having little, if any, impact on middle-class and low-income earners. The overall impact of the tax increases would be significantly larger for the rich even if all of the increases take place, with the top one percent seeing a 7.2 percent increase versus a 5.1 percent increase for all other taxpayers.

The top-line tax number new outlets are taking from the TPC report is certainly ugly: raising taxes on the middle-class would have a negative economic impact at a time when the country is still recovering from the Great Recession. But that calamity should be easily avoidable, given that both sides agree that those cuts should be preserved. The vast majority of the tax increases that would result from going over the “cliff” would have little economic impact since they primarily affect the wealthy, and, as a Congressional Budget Office report made clear earlier this year, the biggest economic threat posed by the fiscal cliff comes not from the tax side, but from its massive spending cuts.

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