This document summarizes the tax code changes and spending cuts that would go into effect on January 1, 2013 if Congress fails to act, known as the "fiscal cliff." Most individual income tax rates would increase substantially. Capital gains and dividend tax rates would also rise significantly. Spending cuts of 9.4% for defense and 8.2% for non-defense programs would take effect. The Congressional Budget Office predicts this would cause the economy to enter a recession with unemployment rising to over 9%. There is debate around a more balanced approach that raises revenues through tax reform in addition to spending cuts.

1. Tax Code Spending, the Fiscal
Cliff - Choices for the Future
Katherine Savers McGovern
Democratic Candidate
U.S. House of Representatives
CD-32

2. Tax Code Rate Changes EffectiveJan. 1, 2013
• The Tax Code Rates will revert to those in
effect in 2001.
• Capital Gains Rates will be a maximum rate of
20% if held less than 5 years for most
taxpayers; lower income taxpayers will have a
maximum rate of 10% if held less than 5 years
• Dividends paid to individuals are taxed as
ordinary income

3. 2001 Tax Rate Schedule

4. 2002 Tax Rate Schedule

5. 2005 Tax Rate Schedule

6. 2005 Tax Rate Schedule

7. 2012 Tax Rate Schedule

9. WHO GETS BUDGET DISTRIBUTIONS AND TAX CODE SPENDING BENEFITS

10. UNDERSTANDING THE FISCAL CLIFF
by Jonathan Wiseman, published in NYT Blog March 2012.
Almost everyone who pays taxes would see a hit to take-home pay in
the first paycheck of January. The lowest income tax rate would rise
to 15 percent from 10 percent. The highest rate would rise to 39.6
percent from 35 percent. The 25 percent, 28 percent, and 33 percent
rates would rise to 28 percent, 31 percent and 36 percent
respectively. Most capital gains taxes would rise to 20 percent from
15 percent. The tax rate on dividends, now set at 15 percent, would
jump to ordinary income tax rates, and since most dividend taxes are
paid by the wealthy, that would mean a new dividend tax rate of 39.6
percent. The exemption on taxation of inherited estates would drop
to $1 million from $5 million. The tax rate above that exemption
would jump to 55 percent from 35 percent.

11. Even many of the working poor who do not earn enough to face
such taxes would take a hit when a temporary, two-percentage-point
cut to the payroll tax that funds Social Security and Medicare expires
on Jan. 1. In all, taxes would rise by as much as $6 trillion over 10
years, $347 billion in 2013 alone, if the Bush-era tax cuts expire
along with the payroll tax cut, and Congress fails to deal with the
expanding alternative minimum tax, according to the Congressional
Budget Office and Decision Economics Inc., a private economic
forecaster.
On the spending side, most defense programs would be sliced by 9.4
percent. Most non-defense programs outside the big entitlements
— Social Security, Medicare and Medicaid — would be cut by 8.2
percent. Medicare would be trimmed by 2 percent. Social Security,
veterans benefits, military personnel, Medicaid and the Children's
Health Insurance Program would be exempt.

12. Even many of the working poor who do not earn
enough to face such taxes would take a hit when a
temporary, two-percentage-point cut to the payroll
tax that funds Social Security and Medicare expires on
Jan. 1. In all, taxes would rise by as much as $6 trillion
over 10 years, $347 billion in 2013 alone, if the Bush-
era tax cuts expire along with the payroll tax cut, and
Congress fails to deal with the expanding alternative
minimum tax, according to the Congressional Budget
Office and Decision Economics Inc., a private
economic forecaster.

13. Most economists and the nonpartisan Congressional Budget Office
predict that if nothing is done, the twin impacts of broad tax
increases and across-the-board spending cuts would send the
economy back into recession. The 2013 impact alone — about $600
billion in tax increases and spending cuts — exceeds the projected
growth of the gross domestic product. The Bipartisan Policy Center
estimates that the cuts — called sequestration — could cost one
million jobs in 2013 and 2014.
The Congressional Budget Office projected that real economic
growth would decline at an annual rate of 2.9 percent during the first
half of 2013. Unemployment would rise to 9.1 percent by the end of
next year.

14. President George W. Bush and Republicans in Congress could not
muster the 60 votes in the Senate to pass Mr. Bush's initial 10-year,
$1.7 trillion tax cut in 2001, so they used a parliamentary tool called
reconciliation to pass the tax cuts with a simple Senate majority of 51
votes. The catch was that this meant the tax cuts would expire after
the 10-year budget window closed in 2011. In 2003, when Mr. Bush
went back for another round of tax cuts, Republicans in Congress
again used reconciliation to avoid a Democratic filibuster and
maximized the initial size of the tax cuts by having them expire at the
same time as the first tax cuts, in 2011.
After the 2010 elections, President Obama struck a deal with
Republicans to extend the tax cuts for another two years, as well as
add other tax measures, like the payroll tax cut, to help the economy.
Now that extension is ending.

15. The across-the-board cuts are more complicated. The
newly elected Republican House in 2011 refused to raise
the debt ceiling, the nation's statutory borrowing limit,
without legislation guaranteeing that the increase would
be at least matched by deficit reduction. Congress and the
White House agreed to spending caps that shaved about
$1 trillion off projected growth over 10 years. They also
created a special, bipartisan deficit reduction committee
to find another $1.2 trillion in savings over 10 years. If that
effort failed, savings would be guaranteed by automatic
cuts to both defense and nondefense programs beginning
in 2013. The so-called super-committee failed, and the
government is now staring at the consequences.

16. How Should We Balance Budgetary Spending for
Discretionary and Non-Discretionary Expenses
Against Unfunded Tax Code Spending Through:
• Exclusions
• Exemptions
• Credits
• Deductions
• Subsidies
This questions the current debate’s scope which, so far, has
been limited to budgetary spending and cuts thereto. The
sequestration a/k/a Fiscal Cliff focuses cuts plus the expiration
of the “Bush” tax cuts – which include much more than the
tax rate for the wealthiest taxpayers.

17. Based on a summary of expiring or expired provisions
in the Tax Code of credits, exemptions, exclusions,
deductions, and tax rates, approximately 81 tax code
provisions which, in one way or another, lowered the
revenue which the United States Treasury would
otherwise receive.
I have seen no dollar value placed on this waiver of
revenue, but note that the actual amount of waived
revenue otherwise due is much larger that the 81 tax
code provisions which are expiring. Consider that
none of the credits, exemptions, special cost basis or
alternates for calculating income from producing oil or
natural gas wells are included.

18. Some strategy aside from simply cutting expenditures from
the budget must be devised to protect future generations
from the consequences of the manner in which our
representatives have agreed to proceed.
Perhaps we should revisit the Simpson-Bowles proposal for
the simple reason that it provides a structure or framework
upon which a plan for handling current budgetary needs and
addressing longer term deficit reduction goals.
As discussed below, Simpson-Bowles, when proposed,
presented choices which themselves created problems.

19. The five serious flaws of Bowles-
Simpson
Posted July 18, 2012 at 12:15 pm by Ethan Pollack
1) It would weaken the economy by cutting way too
fast
The proposal admits that Congress should not cut too soon “in order to avoid shocking
the fragile economy,” but addresses this by “waiting until 2012 to begin enacting
programmatic spending cuts, and waiting until fiscal year 2013 before making large
nominal cuts.” Given the current weak state of the economy, it’s clear that this
timetable was way off. But it’s not like this was unexpected: In Aug. 2010 (three months
before the Bowles-Simpson proposal was released) the Congressional Budget Office
projected that the unemployment rate would be still be 8.4 percent in fiscal year 2012.
Of course, it was possible that the economy would outperform this projection, but it
was also possible it would underperform. Given this uncertainty, the proposal should
have included an economic trigger and not just a simple-minded timeline—for example,
the cuts would only take effect if the economy was experiencing healthy growth and
well on its way to full recovery. At the time, EPI had recommended this trigger be set at
6 percent unemployment for six months, which in retrospect looks quite prescient.

20. 2) It had an unbalanced ratio of spending cuts to
revenue increases
The advertised ratio of spending cuts to revenue increases was 3-to-1. This isn’t totally
accurate: Excluding interest savings (which are a function of both spending and revenue
decisions) and including the additional revenue assumed in the baseline (i.e., the assumed
conditions against which the proposal is measured) from the expiration of the high-income
Bush tax cuts, the ratio was closer to 55-to-45.
But that’s still too heavily weighted towards spending cuts. Over the last two decades,
budget deals have skimped on tax increases in favor of heavy spending cuts, and the most
recent deal—the Budget Control Act—was 100 percent spending cuts. Furthermore, the
Bush tax cuts themselves account for nearly half of the total debt accrued during this
period. Finally, spending cuts exacerbate the massive and growing income inequality in
this country by generally falling on middle- and low-income households (Paul Ryan’s
budget, for example) while federal tax increases can be designed to ensure that high-
income individuals pay their fair share.

21. 3) A completely counterproductive and politically-
driven revenue cap
As a policy matter, the revenue cap that Bowles-Simpson proposes—21 percent of
GDP—makes no economic sense. Remember, deficit reduction packages are supposed to
reduce the deficit. Yet this provision would “prevent” future Congresses from reducing
the deficit through tax increases above 21 percent, which would effectively rule out the
federal revenue levels that nearly every single other developed country already
achieves—and that rising costs of health care provision all but guarantee the United
States will need in coming decades. The best thing to say about this provision is that
there isn’t an enforcement mechanism, which also suggests that even its authors didn’t
think it was good policy.

22. 4) Inexorable cuts to public investments
The proposal doesn’t explicitly cut items like education, infrastructure, and research and
development, but it does prescribe funding levels for the broader non-security
discretionary (NSD) portion of the budget that houses nearly all non-defense public
investments. As my report last year shows, it is pretty much impossible to make drastic
cuts to NSD without cutting public investments.
So why do public investments matter? Because the whole economic point of deficit
reduction is to improve the living standards of future generations by ensuring that we do
not pass onto them high levels of debt. But financial debt isn’t the only kind of debt that
we can pass on to them. For example, failing to maintain our infrastructure and
bequeathing crumbling roads and bridges is also a form of debt. So is providing poor
prospects for obtaining a decent education. Reducing the debt load on future generations
by cutting an investment in those same future generations doesn’t make them any better
off, and thus negates the entire point of deficit reduction in the first place. Given the high
returns of public investment, it is likely the net effect on these generations will be
strongly negative.

23. 5) It would undermine retirement security by
cutting Social Security
The Bowles-Simpson proposal wouldn’t only cut Social Security benefits, it would do so in a
way that harms the middle class. According to the Social Security Actuary, medium-income
retirees would see their benefits drop by 4 percent for those who retire in 2030 to nearly 20
percent for those who retire in 2080. This is largely a function of two separate cuts, both of
which fall on the low- and middle-class: raising the retirement age and using an alternate
method to calculate cost of living adjustments, the so-called “chained CPI.”
Proposed cuts to Social Security need to be put in the context of broader retirement security.
Social Security represents one of three sources of retirement security, the other two being
defined benefit pensions and household savings (IRAs, 401(k)s, real estate, etc.). But private
savings do a poor job of providing actual security—just ask a near-retiree how their nest egg
fared after the financial collapse—and it’s unclear how much savings the average household
can accrue in the first place when median wages continue to stagnate. Further, defined benefit
pensions are becoming less and less common as more and more companies choose to drop
them in favor of defined contribution plans (401(k)s or similar plans) which, again, provide
little actual security against economic volatility. Social Security is the last reliable source of true
retirement security for the middle class, and that means it’s more important than ever to
protect it against cuts like these.

24. Not all bad
I would be remiss to point out that there are some good elements of the Bowles-Simpson
plan. It raises nearly $2 trillion relative to current policy (which assumes all expiring tax cuts,
such as the Bush tax cuts, are extended) and equalizes the taxation on capital and labor
income (though it still fails to ensure that the rich pay their fair share, given the increase in
income inequality by dedicating extra revenue gained from broadening the tax base to
reducing marginal rates). It aggressively cuts defense spending. It raises the gas tax, thus
shoring up the Highway Trust Fund and making transportation reauthorization an easier lift.
It largely spares—and even builds on—the Affordable Care Act. Finally, while the ratio of
spending cuts to revenue increases is flawed, it is better than most of the other “grand
bargain” proposals—including some reported offers made by the Obama administration—
that have come out in the last few years, which focus much more heavily on spending cuts.
But these strengths do not make up for Bowles-Simpson’s weaknesses, and being the “least-
bad” budget proposal taken seriously by Beltway pundits is an achievement on the order of
being the tallest leprechaun. Without significant changes, it would cost jobs, reduce long-
run investment and economic growth, and endanger middle-class retirement security.