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The Fiscal Cliff: Who Has the Most to Lose If We Fall Off

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Barack Obama and Mitt RomneyOn Tuesday night, President Obama and former Massachusetts Gov. Mitt Romney will meet for their second debate. The bout over foreign and domestic policy should be an interesting engagement: Romney hopes to consolidate his gains from the first debate, while the president hopes to make up some of the ground he lost.

But beyond the land of debate prep, the political arena is getting hotter. The "fiscal cliff" -- a pending economic catastrophe that is haunting the election -- is drawing closer, and pundits have already begun talking about the specific ways in which it will hit the economy. The Tax Policy Center has announced that, if we hurtle over the fiscal cliff, the average middle class family would pay an additional $1,984 in taxes in 2013.

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 impressive, it hides the true cost of the fiscal cliff, a precipice 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, almost twice as much. The huge gap between those two numbers reveals the wide difference between middle class and upper class tax breaks -- and hints at the grand class battle that awaits Washington after November's elections.

He Who Controls the Purse Controls 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.

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 a far steeper 5.8%.

All Taxpayers Are Equal ... But Some Are More Equal Than Others

A large factor in this uneven impact relates to 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. Others, like the Bush tax cuts, benefit all income groups, but pay off more for the wealthy.

And 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 zeroed out, 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%.

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.

Ultimately, both parties are hoping that the November elections will give them an edge in the fiscal cliff fight -- and until Nov. 7, it's impossible to predict the shape of the deal that will (we hope) be struck by the president, the House of Representatives and the Senate.

Regardless of what happens in Washington's version of Animal Farm, however, one thing is clear: When it comes to taxes and the fiscal cliff, the richest Americans have a lot more to lose than the rest of us -- a fact that their highly-paid lobbyists in Washington are sure to have in mind come December.




Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.


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craftluv45

How much does Obama earn a year, and after taxes, how much does HE have to spend on himself and his family? Hmm, those at $38,000 a year will have a lot less to survive on, after taxes rich people are STILL rich. For a family of 4, $38,000 is VERY slim.

November 10 2012 at 1:57 AM Report abuse rate up rate down Reply
dus48

is this a joke.we are in debt to china uo to our eyeballs.we are borrowing like there is no tomorrow not a question was answered about our attack in libiya.just a lot of talk. not one answer.hillary clinton finally had to come to the rescue.simply stunning.total irresposibility.

October 17 2012 at 4:24 PM Report abuse +1 rate up rate down Reply
chris1011

"Government does not create jobs." Mitt.ens

"Elect me and I'll create 12 million jobs." Also Mitt.ens

October 17 2012 at 12:53 PM Report abuse rate up rate down Reply
Firefly Tech

We all loose with this financial cliff! But who put us there is the question? Obama doubled out debt in just four years, he is the reason for the financial cliff. If you want to take over a country as strong as us, the only way is to cripple its financial system like he is doing.

October 16 2012 at 11:37 AM Report abuse +1 rate up rate down Reply
leonjwitter

ROMNEY SHOULD OPEN UP ABOUT THE NON-FICTION BOOK [THE AMATEUR] TELLS SIX PAST YEARS OF OBOMA,S NON PARTICIPATION IN HIS POSITION AS SENATOR AND PRESIDENT; WHERE SHAMES HIMSELF BY THROWING ALL [DEM & REP] UNDER THE BUS FOR HIS MISTAKES AND NON PARTICIPATION.

READ THE BOOK BY EDWARD KLEIN..

October 16 2012 at 11:03 AM Report abuse rate up rate down Reply
ilm9p

You know who doesn’t have a thing to lose? The scum on welfare that’s who. The dirty animals that sit around all day in free section 8 housing, with free utilities, free Cable TV, free phones, free healthcare, free food, free everything. And this putrid filth that offers nothing of value to society, that refuses to work; Thanks to free healthcare they’ll crap forth five or six welfare babies to get even more stuff for free. Then when this spawn is old enough, they’ll send them to school to get free breakfast, free lunch, free school supplies only to get knocked up at 14 and start the whole process all over again.

October 16 2012 at 9:02 AM Report abuse rate up rate down Reply
1 reply to ilm9p's comment
hgregoryfox

Republicans should vote for pro-choice. Planned paranthood should be well funded. Government should pay for all forms of birth control but not force it onto any body. If people have choice in the quality of life and they have the means to make those decisioins you will get better results. Incentivising the poor to reduce family size is a political hot potato but taking away the right to choose only makes republicans responsible for the growth in poor population.

October 16 2012 at 7:04 PM Report abuse +1 rate up rate down Reply
keywestlucas

Here is a Slogan : Here goes : U Bombed Obama . Too Much Drama , Obama !!
Vote for Romney and Ryan in 2012 and WE can SEE the REAL FORWARD PROGRESS ...INSTEAD of BACKWARD PROGRESS the OBAMA ADMIN. has been doing !
Romney / Ryan 2012

October 16 2012 at 7:26 AM Report abuse -1 rate up rate down Reply
lchap17156

The country needs help and healing. I believe Romney and Ryan can do it. No more class warfare, Romney has the leadership skills and bipartisan background to at least have a chance. In the last debate we saw a leader and a community organizer without a clue.

October 15 2012 at 11:05 PM Report abuse rate up rate down Reply
1 reply to lchap17156's comment
chris1011

Class warfare is B.S. While the very wealthy are reaping ever more of the nation's wealth, they have the balls to cry that they are victims. Meanwhile the working poor fall further and further behind.

October 16 2012 at 11:33 AM Report abuse +1 rate up rate down Reply
1 reply to chris1011's comment
t_trevor1

Of course, "the nation" doesn't have wealth. Only citizens posses wealth.

Since your parents miserably failed you, here's a rule by which to live your life: Stealing is wrong.

October 17 2012 at 11:02 AM Report abuse rate up rate down
lchap17156

God Bless America! I hope Romney and Ryan can save it.

October 15 2012 at 11:03 PM Report abuse rate up rate down Reply
oohsah

Just make us all slaves and get it over with!

October 15 2012 at 8:24 PM Report abuse +3 rate up rate down Reply