The political arena is finally heating up beyond the land of debate prep. The “fiscal cliff” – what some call a pending economic calamity that is happening outside the bubble of the circus that has become American elections — is drawing closer, and analysts have already begun talking about the specific ways in which it will affect the economy. The Tax Policy Center has announced that, if we “Thelma and Louise” over the fiscal cliff, the average middle class family would pay an additional $1,984 in taxes in 2013, or an extra $165.33 per month.
The number brings to mind George Orwell, the patron saint of political satire; 1984, after all, is the title of Orwell’s famous novel of bureaucratic evil run amok. But today, just as in Orwell’s dystopia, the most important thing isn’t what is being said, but what is not. Because, while the $1,984 sum is imposing, it hides the true cost of the fiscal cliff; an abyss that will punish all families, but some more than others.
Yes, the average middle-class family will pay $1,984 more, but the fiscal cliff will cost the average family overall $3,446, or almost twice as much. The sizeable gap between those two numbers reveals the chasm between middle class and upper class tax breaks (and hints at the grand class battle that awaits Washington after November’s elections between the big-money interests who have been funding the majority of this $1 billion presidential campaign and the suitors who represent the average family or the poor in this country).
Control the Purse Control the Future
The definition of “middle class” varies greatly depending on who is talking, but strictly by the income numbers, the third quintile is the middlest of the middle. Households within this 20% of the populace make between $38,521 and $62,434 per year, and average $50,477. At that level, a tax increase of $1,984 works out to another 3.8% of every paycheck that goes to the taxman.
To illustrate just how out-of-touch with the average American Mitt Romney remains after decades of campaigning, asked recently what he believes constitutes the average income for a middle class family, Mr. Romney brushed aside the reporter’s suggestion of $100,000 and suggested it was closer to $250,000.
The average family, though, will kick in an extra $3,446, because in terms of straight percentages the tax increases will hit families higher up the income ladder much harder than those in the middle or at the bottom. And that massively skews the average.
In this regard, the fiscal cliff is somewhat progressive, landing harder upon the rich. For families in the first four quintiles (groups that could be described as “poor,” “working class,” “middle class,” and “upper middle class,”) the potential fiscal cliff tax increase percentages range from 3.7% to 4.2%. For the richest 20% of households, however, the tax increase would be a far steeper 5.8%.
Some Taxpayers Are More Equal Than Others
A dominant factor in this uneven impact is dictated by which specific tax breaks will expire if we reach the fiscal cliff. While analysts tend to lump all these tax changes together to simplify to discussion, the issues in play are actually a widely disparate collection of specific tax deals that unevenly benefit various groups. The payroll tax cut, for example, is most beneficial for households making less than $110,000 per year because $110,000 is the current cap upon which payroll taxes are collected. Others, like the Bush tax cuts, have benefited all income groups, but more so for the wealthy.
Then there are the tax breaks that specifically benefit the wealthiest taxpayers; as it stands, many of these will disappear on Jan. 1, 2013. Perhaps the most obvious is the estate tax. In 2009, the first $3.5 million of an estate was untaxed, and the remainder was taxed at a top rate of 45%. The following year, the tax was removed entirely, effectively granting a tax holiday to wealthy families whose members died. When the tax returned in 2011, the “exclusion amount” rose to $5 million — and later to $5.12 million in 2012 — while the top rate on amounts exceeding that dropped to 35%. In 2013, assuming the fiscal cliff comes to pass, the exclusion amount will fall to $1 million and the top rate will rise to 55%. This could be the reason the primary noise-makers regarding the calamity which befall the country if the fiscal cliff occurs, has been your friends and mine—Wall Street. Those poor, picked on perpetrators of the parsimonious predicament most Americans were left with in 2008.
Even at this new, much lower level, the estate tax will only hit 2% of those who die in 2013.
So for middle and lower-class families, this change will be academic, but for households at the top of the pyramid, it will hit hard.
The same is true of the Bush’s 2001 high-income tax cuts and the preferential capital gains and dividend tax rates that he pushed through in 2003. Combined with other tax increases, the repeal of these tax breaks will cost the richest 20% of families an average of $14,173 each. For taxpayers in the top 1%, the cost rises to just over $120,000 — or more than 7% of their income.
At the end of the day, both parties are hoping that the November elections will give them an edge in the fiscal cliff imbroglio — and until Nov. 7, it’s impracticable to envisage the shape of the deal that will (we hope) be struck by the president, the House of Representatives and the Senate.
But regardless of what happens in Washington’s version of Animal Farm, one thing is painfully clear: When it comes to taxes and the fiscal cliff, the richest Americans have a much more to lose than the rest of us — a fact that their well-compensated lobbyists in Washington are sure to have in mind come December.
I, for one, recently purchased a 1966 Ford Thunderbird convertible and would have no problem experiencing the “freedom” felt by Thelma and Louise in their ride into the abyss of the Grand Canyon rather than wait for the plutocracy’s yellow rain to trickle-down onto me.