Reports say that nearly 90 percent of all Americans will face higher taxes next year because of the upcoming “fiscal cliff,” a term created to refer to the massive amount of changes in current laws set to trigger in January. This precipice of tax hikes and spending cuts is so dangerous that it threatens to throw the United States in a second recession. The majority of this change occurs because of the expiration of tax cuts enacted in 2001 and 2003 during the Bush administration.
Furthermore, President Obama’s payroll tax holiday also expires by the end of this year. According to Donald Marron, director of the Tax Policy Center, the “fiscal cliff” is the result of “an accumulating snowball of temporary tax provisions.”The expiration of all these tax reduction policies will result in a $536 billion collective rise in tax rates, around $3,500 per household. Many individuals are already starting to call the end of this year a “taxmageddon.”
Naturally, the impact will vary by income level, but surprisingly, the ones who will be hit the hardest are the lowest earners. In 2009 Obama, introduced an economic stimulus package that included a temporary expansion of the earned income tax credit and the child tax credit for working families. It also bumped up a two-year, $1800 tax credit for college tuition to four years for $2,500. A study has shown that the expiration of these tax cuts will create many problems for low-income families.
In a rare moment of unity, both political parties have expressed the need to reduce the size of the fiscal cliff. However, their methods to do so are different. Republicans want to extend the expiration of all the tax breaks while Democrats want to have only the Bush tax cuts expire.
Researchers predict that the payroll tax holiday will most certainly be allowed to expire, which would lower the average worker’s income by about $80 a month. However, they also predict that Congress will attempt to prevent the alternative minimum tax from harming another 20 million families in April.
