Absent action from Congress and the president, the United States will face what many are calling a “fiscal cliff” at the beginning of 2013. That describes the increase of several key tax rates as the early-2000s tax cuts expire, the reduction of certain jobs provisions, activation of $1.2 trillion in across-the-board budget cuts (“sequestration”) as part of the 2011 Budget Control Act, sharp reductions in Medicare physician payments, the end of the Alternative Minimum Tax patches, and the expected need to raise the debt ceiling.
These combined tax increases and spending cuts would increase federal revenues but would have very little effect on total federal spending. According to estimates from the Congressional Budget Office, the mandates under the current law would increase revenues from 15.7 percent of GDP in 2012 to 18.4 percent of GDP in 2013, while spending would fall by only about .5 percentage points, from 22.9 percent of GDP to 22.4 percent of GDP—still 1.4 percent above the historical federal spending average of 21 percent.
Many of the proposals for addressing the fiscal cliff have centered on extending the early-2000s tax cuts—either in their original form for all taxpayers, or for everyone but the highest earners. Neither proposal has gained any traction in Congress. The Heartland Institute has written about many of the individual elements of the “fiscal cliff” scenario, including several specific hikes on financial taxes that would have a dire effect on financial markets, investment, and the economy.
With the U.S. economy still struggling to crawl out of the economic downturn, it’s important to avoid policies that impede growth and investment. Allowing the nation to go over the fiscal cliff is not the right choice. Congress should consider delaying these mandates and taking the time to craft tax and spending policies that make the nation more competitive internationally and allow the economy to gather the strength to pull out of the current recession.
The following is a collection of Research & Commentaries from The Heartland Institute on Taxmageddon and the fiscal cliff, plus other documents examining the subject.
Research & Commentary: Carried Interest Taxes
The first financial tax The Heartland Institute covered in its work on the fiscal cliff and Taxmageddon was the proposed changes in how carried interest—the share of the profits of an investment or investment fund that is paid to an investment manager as compensation—will be taxed. The higher rates on carried interest are essentially a special tax on financial entrepreneurs. The current, lower tax rate on capital gains applies to all industries, whereas the new one would single out private equity and venture capital firms and hedge funds for a heavier tax.
Research & Commentary: The Effects of Dividend Tax Changes
The upcoming hike in dividend taxes will stifle economic growth while slashing the value of retirement plans and other investments. Increasing the dividend tax would diminish the retirement investments of middle-income Americans, because a sizeable amount of investment earnings of 401k plans, stocks, and pension plans are derived from dividends. Dividend-paying stocks such as utilities would become significantly less attractive, harming stockholders and workers.
Research & Commentary: Capital Gains Taxes Update
One of the most significant tax hikes on the way is the dramatic hike in the capital gains tax rate, which is paid by individuals and corporations on profits realized when a capital asset is sold. Currently the top tax rate for capital gains is an internationally competitive 15 percent. Starting in January, the long-term capital gains tax rate will rise to 20 percent. The United States will then have a tax lower than only six of the 25 major national economies. This 33 percent tax hike will further reduce the competitiveness of the U.S. economy and discourage domestic investment.
Research & Commentary: Estate Taxes
Few taxes imposed by state and local governments are more controversial than the estate tax, popularly known as the “death tax.” Estate taxes are levies on property transferred from a deceased person’s estate to relatives or other parties. The estate tax rate is scheduled to increase automatically, and the amount excluded from the tax will plummet from $5 million to $1 million, if Congress does not vote to extend the current rates. Estate taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates, and brings relatively little revenue. Lowering the estate tax or eliminating it completely would create jobs and promote savings and investment while not penalizing individuals who saved for the next generation.
The following is a collection of research examining other aspects of the fiscal cliff.
Between a Mountain of Debt and a Fiscal Cliff
The Committee for a Responsible Federal Budget outlines the consequences the United States faces from both the fiscal cliff and the nation’s rapidly increasing federal debt. The authors oppose allowing the fiscal cliff to occur; they recommend gradually phasing in tax and entitlement reforms over an extended period of time to minimize harm to the economy. “A comprehensive deficit reduction plan can offer a win-win by giving the economy space to recover in the short-term while enacting long-term reforms to strengthen the economy and put the country’s finances in order. Policymakers should avoid the fiscal cliff and take this course instead,” they write.
Taxmageddon: Massive Tax Increase Coming in 2013
Curtis Dubay of The Heritage Foundation discusses the many sources of the enormous, unprecedented tax increase that will fall on American taxpayers starting January 1, 2013. Dubay calls on Congress and the White House to start working together to prevent the tax hikes and assure families, businesses, and investors their taxes will not rise sharply and prolong the economic stagnation.
Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013
The Congressional Budget Office examines the possible economic effects of a reduction of the tax hikes and fiscal restraints scheduled to start in 2013. The CBO estimates that growth of real GDP in calendar year 2013 would be around 4.4 percent, well above the 0.5 percent projected for 2013 under current law.
Going over the “Fiscal Cliff” Means Significantly Higher Tax Bills for Americans of All Incomes
The fiscal cliff would increase Americans’ taxes by more than $500 billion in 2013, or almost $3,500 per household. A typical middle-income household would see its taxes go up by roughly $2,000. Using the Tax Policy Center’s micro-simulation model of the U.S. tax system, the authors examine in detail how the upcoming tax hikes would affect taxpayers at different income levels.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].