(Photo: Reuters/Yuri Gripas)
The "fiscal cliff" bill, or the "American Taxpayer Relief Act of 2012," increased taxes, President Barack Obama says. Many Republicans say the bill lowered taxes. As a corollary, Obama says the bill will lower budget deficits. But the Congressional Budget Office says the bill will require even more government borrowing. Who is right?
In a video posted to his campaign website Wednesday, Obama said, "the agreement we reached this week will reduce the deficit even more by asking the wealthiest two percent of Americans to pay higher taxes for the first time in two decades. So that's progress."
The fiscal cliff law "further reduces the deficit by $737 billion," Obama claimed in his weekly radio address Saturday, "making it one of the largest deficit reduction bills passed by Congress in over a decade."
Republicans who voted for the bill claim, though, that they voted to cut taxes. Further, the CBO estimated that the fiscal cliff law will add nearly $4 trillion to the national debt over 10 years.
The public also seems confused on whether the bill was a tax increase or a tax cut. According to Rasmussen Reports, 50 percent of likely voters believe middle class taxes will go up as a result of the fiscal cliff bill, 29 percent believe middle class taxes will not go up, and 21 percent are unsure.
Depending on how one views the situation, both sides can claim their position is correct. Technically, the bill cut taxes, but the reality is that taxes will not be lower in 2013 than they were in 2012, and most will be paying more in taxes.
Here is the reason. The Bush-era tax cuts, first passed in 2001 and 2003 and extended in 2010, expired at midnight on December 31. This means that income tax rates had gone up for all income groups when the Senate voted in the early morning hours, and the House voted late in the evening, on New Year's Day. Congress voted to return tax rates to the levels they were in 2012 for all but the wealthiest one percent (couples making more than $450,000 and individuals making more than $400,000). So, while it was, technically speaking, a tax cut, no one will pay less in taxes in 2013 than they did in 2012 (unless you make less money or take greater advantage of tax preferences).
Indeed, most workers will actually see a tax increase because one tax cut – the payroll tax cut – was not extended. For the past two years, workers have enjoyed a two percent cut, from 6.2 percent to 4.2 percent, in the payroll tax, which is taken out of every paycheck to fund Social Security.
Laura Green, a journalist for the Palm Beach Post, calculated the impact of that tax increase for different income groups. Those making between $20,000 to $30,000, for instance, will pay, on average, $297 in taxes, those making between $40,000 to $50,000 will pay, on average, an additional $579, and those in the $75,000 to $100,000 income range will pay, on average, about $1,206 more to help fund Social Security.
Additionally, when Obama says the law will reduce the deficit, he is comparing the law to tax policy in 2012. When the CBO says, on the other hand, that the bill will add $4 trillion to the national debt, it is comparing the law to the policy that would have occurred if the bill had not passed, or if the government had gone over the fiscal cliff.