The Two-Way
7:10 am
Mon October 1, 2012

Report: If Congress Ignores 'Fiscal Cliff,' Most Americans Will Pay More Taxes

Unless Congress passes legislation in a lame-duck session, taxes will be higher by a half-trillion dollars next year, costing the average household nearly $3,500 a year, according to a just-released report by the Urban-Brookings Tax Policy Center.

After studying details of the tax changes now set to take effect for 2013, the researchers were struck by "how big the tax increase is," said Eric Toder, one of those researchers. "It's a huge, huge number."

The report concluded that in 2013, "almost 90 percent of Americans would see their taxes rise."

The tax changes are part of what has come to be known as the "fiscal cliff," a range of temporary tax-break expirations and government-spending cuts. The coming changes are set on auto-pilot; they were put into place by U.S. lawmakers who could not agree on permanent compromises. (Our friends at Planet Money have an explainer.)

Over the past 11 years, starting with President George W. Bush's first term, Congress has passed an array of temporary tax cuts and patches to fix tax code flaws. Last year, Congress also imposed automatic spending cuts that will kick in shortly. Congress is out of session until after the Nov. 6 election, and will deal with the issues in a lame-duck session, starting Nov. 13.

Economists are virtually unanimous in saying that unless Congress changes course before Dec. 31, the country will be driven over an economic "cliff" and into a new recession.

The Tax Policy Center examined just the tax implications (pdf), and found that the coming changes would indeed have a dramatic impact.

"Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff," the report said.

At a press briefing this morning, the researchers said Congress appears ready to allow the temporary cut in Social Security payroll taxes to expire. That's because that one "was always intended as a temporary stimulus measure," the report said.

The 2007-2009 recession technically has been over for more than three years, so the justification for saving the average worker about $20 a week has ended. That means everyone earning a paycheck would see their contribution to Social Security revert to where it was before the recession, leaving them with a smaller take-home amount.

And wealthy Americans who own stocks would see very big changes, with their taxes going up 7 percentage points on long-term capital gains, and by more than 20 percentage points on qualified dividends.

"If investors believe it will actually happen, the pending increase in the capital gains tax rate could induce them to sell appreciated stocks, bonds, and other assets before the end of 2012," the report warned.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.