What is the fiscal cliff?The fiscal cliff is the impending expiration of a whole slew of tax cuts, including almost every tax cut that has been enacted since 2001.
This includes the Bush-era cuts on high-income Americans as well as Obama’s cuts on low-income Americans, such as the Earned Income Tax Credit. These two specific taxes are the most disputed at the moment throughout a polarised Congress.
Congress will likely argue over which tax breaks with expire and which will not; as a result, the impact on Americans of different income levels is unpredictable at this time because these disputed taxes primarily affect those who earn incomes that fall above or below specified limits.
The Tax Policy centre reported that the $500 billion tax hike currently in place for January 1, 2013 will add up to an average of $3,500 per household in yearly taxes.
Expiring Bush-Era Tax Cuts
TaxMore DetailsWho did it help?Lower tax rates for the top four tax brackets The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) reduced rates for high income-earners High income earners No limitations on itemized deductions 2010 saw the repeal of itemized deduction limits (which formerly mainly affected high income-earners) High income earners Lower taxes for families with children As a result of EGTRRA, the child tax credit increased from $500 to $1,000 Families with children Lower taxes for married couples EGTRRA reduced marriage tax penalties and increased the earned income tax upper threshold Low-income married couples Lower taxes on long-term capital gains Long-term capital gains are profits on assets that have been held for one year or more. This mainly benefitted high income-earners because they have more invested assets High income earners Lower taxes on qualified dividends Instead of being taxed at the same rate as income, the tax rate on qualified dividends was lowered so that it was the same as the tax rate on capital gains High income earnersExpiring Obama-Era Tax Cuts
TaxMore DetailsWho did it help?Increase in Earned Income Tax Credit (EITC) and expansion to more families The EITC wage subsidy rate was increased from 40% to 45% for large families (3+ children) and the credit phaseout range for married couples was raised by $2,000 Low income earners and large families Child Tax Credit Refund Families were able to claim a child tax credit of $1,000 for dependent children under 17 Families with children American Opportunity Tax Credit (AOTC) for college students This credit replaced the Hope credit, allowing students (earning under $80,000 as individuals or $160,000 as a joint couple) to claim this credit for four years instead of two years, raising the maximum credit by $700, and increasing the allowable refund to 40% Students and families earning under $160,000 per year
If the fiscal cliff goes forward as planned, what will change?
The Budget Control Act of 2011, which consists of a combination of tax increases and spending cuts, goes into effect with the new year The fiscal cliff will cause a sharp reduction in the federal budget deficit—it will result in $500 billion increased income from taxes and $110 billion saved from spending cuts.
So what have the Presidential candidates said about the fiscal cliff and how they will address it?
October 3 debates
If Obama is elected, he will reduce the deficit through spending cuts across the board and increasing taxes on those who make $250,000 or more per year, as he has proposed. In the October 3 debates, Obama stated, “Romney’s plan calls for 2 trillion dollars in additional military spending and 5 trillion dollars in tax cuts…how can he make these cuts without dumping costs on middle class Americans?”
Romney was particularly evasive on his tax plan during the debates, but he said he does not plan to reduce the tax rate on high-income Americans. If Romney wins, he has denounced the proposed cut in military spending that will reduce the deficit. He says he will increase military spending, and he also says he will cut rates across the board by 20%.
However, many say that the numbers for both plans don’t add up. Romney’s tax plan has not been released, but Obama has explicitly called for increased taxes on the top tax brackets and reduced military spending. Romney has called for decreased tax rates and increased military spending, and the only spending cut he specifically mentioned during the debate was government funding for PBS.
The fiscal cliff is looming, and while neither candidate addressed it during the debate, Obama at least presented a coherent plan for reducing the deficit. Even after the debates, Romney’s full plan remains to be seen.