President Obama campaigned on the promise that middle-income earners—those earning $250,000 or less annually—would experience no tax increases. On the upcoming New Year’s Day, however, virtually every American will be facing the possibility of higher taxes.
Lowered tax rates on a wide variety of items including personal income, capital gains, dividends, and estate taxes that became law in 2001 and 2003 are set to expire on January 1 unless Congress extends them.
“Everyone’s tax rates will go up; everyone will see significantly higher taxes,” said Curtis Dubay, a senior policy analyst for the Heritage Foundation. “For the middle class that were promised not to pay tax increases, they’ll certainly see a much smaller paycheck starting in January.”
$1,540 per Family
Nationally, the typical middle-income family, which has a median income of $63,366, would see its federal income tax burden increase by $1,540 if the tax cuts expire, according to an analysis by the Tax Foundation.
“The Democrats are falling all over themselves promising the press and the American people that they will extend certain of the 2001 and 2003 tax relief, patch the AMT, etc. However, there seems to be no solid plans for doing so before the election [in November],” said Ryan Ellis, tax policy director for Americans for Tax Reform.
“In essence, they are asking people to trust that Congress will act after people have had [their only] chance to punish Congress if they don’t,” he said. “There are many of us on the right who believe that they don’t care to extend any of the tax cuts. They need the revenue to fund their permanently higher government spending.”
American families and individual taxpayers would not be the only ones affected by the tax hike that will result if Congress takes no action. Ellis says both large and small businesses also have no certainty right now.
“If you’re a large employer, the expiration of the tax extenders—particularly the research and experimentation credit—gives you no ability to plan,” he said. “So there’s no sense of stability there,” he said.
He also pointed out many small businesses pay taxes at the rates applied to individuals.
“No one is sure where those rates are going to be, but there’s an increasing sense among business owners that rates are going up in January. There’s also uncertainty about small business expensing and the death tax,” he said.
Hundreds of Billions More
He said the combination of letting the 2001 and 2003 tax relief provisions expire, failing to “patch” the alternative minimum tax, and implementing the ObamaCare tax hikes would raise the nation’s tax burden hundreds of billions of dollars a year.
The alternative minimum tax was created 40 years ago to apply only to a handful of wealthy taxpayers to ensure they would pay a minimum amount of income tax, but it now affects millions of taxpayers because it has never been indexed for inflation. It does away with most deductions and tax credits, forcing people to pay more income tax.
Congress has been “patching” the tax code in recent years to help some people who would otherwise be hit by the AMT avoid its higher taxes.
“The tired old myth that the 2001 and 2003 tax cuts were just tax cuts for the rich will finally, once and for all, be proven false,” Dubay said.
Alyssa Carducci ([email protected]) writes from Florida.
If Congress allows the 2001 and 2003 tax cuts to expire, these are major changes that would happen:
- Income tax would increas by 3 to 5 percentage points for every bracket, including an end to the lowest tax bracket, currently 10 percent.
- Capital gains tax rates would rise from 15 percent to 20 percent, and dividends taxes would jump from 15 percent to 39.6 percent.
- The death tax would rise from zero to 55 percent on estates over $1 million.
- The child tax credit would drop from $1000 to $500 per child.