The fiscal cliff bill’s impact would be far-reaching for American taxpayers, and particularly painful for very high-income households, according to a new analysis.
About 77% of American households would see a tax increase compared to their 2012 tax levels, according to the analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
The biggest impact for most households comes from the expiration of a two-percentage-point payroll-tax break that existed for 2011 and 2012. It basically hits all working people. But the bill also contains sizable tax increases for the wealthy, compared with 2012 levels. (Of course, now that the fiscal cliff has arrived, supporters argue that the legislation actually represents a tax cut, because tax rates technically went up for just about everyone at midnight Monday.)
The average tax increase for U.S. households paying higher taxes would be about $1,635. But that figure is somewhat skewed by the significant tax increases in store for high-income households under the bill. Almost 100% of households with incomes over $500,000 would see a tax increase. For households between $500,000 and $1 million, it would average $15,055. For households with incomes over $1 million, it would average $171,330.
Households making more than $500,000 would see their average effective federal tax rate rise by 2.2 percentage points to 32.1%. Their after-tax income would drop by 3.1%. Households over $1 million would see their average rate rise by 5.2 percentage points, to 38.5%. Their after-tax income would drop by 7.8%.
The Tax Policy Center analysis of federal tax rates includes individual and corporate taxes, as well as payroll taxes and the estate tax, so it’s broader than just the individual income tax.
The new legislation would allow the top income tax rate to rise to 39.6% for couples making more than $450,000 (singles making more than $400,000). It also would raise top tax rates on investment income to 20% from 15% for those households. The deal also would reinstate limits on personal exemptions and itemized deductions that existed in the 1990s, for couples making more than $300,000 (singles making more than $250,000). It also raises the estate tax top rate to 40% from 35%.