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If I didn't know any better, I'd think there's a small but growing group of people in Washington who think it would actually be good if we temporarily went over the fiscal cliff.
I say that because I am seeing a smattering of articles recently suggesting that somehow going over the cliff "won't be all that bad" or that we're "really just talking about cuts that need to happen in the first place."
President Obama seems to think the same way judging by the fact that he's dug in his heels, telling the GOP there will be no fiscal cliff bargain that doesn't include tax hikes.
Now noted budget hawk Republican Senator Tom Coburn has broken ranks, noting that he'd rather see rates rise because that "will give us a greater chance to reform the tax code and broaden the base in the future."
I find that to be an absolutely appalling argument given how much further the president's proposals will squeeze the middle class.
As Fox Business Network's Gerri Willis, an expert on consumer and personal finance issues, recently pointed out to me, the average middle class tax rate is already 43.12%, according to the non-partisan Tax Foundation.
Beyond that, Willis says if we do go over the cliff, the average middle class tax burden jumps to nearly 50%.
I asked her how she came to that conclusion. I could only smile as she simply noted she'd "done the math," knowing full well that's one of the president's tax hike tag lines.
Unless Congress takes action, Willis observed, the average middle class federal rate jumps to 28% from 25% when the Bush-era cuts are allowed to expire. At the same time, payroll taxes will jump 15% from 13.3% to 15.3%.
Factor in state taxes, which average 4.82% nationwide, and that would take the total average middle class tax burden to 47.5%.
Keep in mind that doesn't include state income tax hikes, city or county taxes, many of which are on the rise no matter where you live thanks to decades of poor fiscal management.
Chances are, many middle-class earners living in states like California, Oregon, New York, New Jersey and Hawaii, for instance, will actually have substantially higher tax burdens that, practically speaking, are well in excess of 50%.
The Rocky Ground at the Bottom of the Fiscal Cliff
The real world stakes behind the debate are very high.
Case in point, the President's Council of Economic Advisors estimate that a rise in middle class taxes and the corresponding decrease in consumption would shave 1.4% off GDP, which is consistent with the signals being telegraphed from that other great oxymoron in DC, the Congressional Budget Office.
Even the president's team has estimated that consumers will spend nearly $200 billion less as a result of higher taxes alone.
Conversely, the latest GOP deal called for $800 billion in new revenue via tax reform while not increasing tax rates on the top 2% of taxpayers. It also involves limiting tax credits and capping deductions.
Naturally it was quickly rejected by the White House because it doesn't meet the "test of balance" according to White House communications director Dan Pfeiffer. House Minority Leader Nancy Pelosi, D-CA, was quick to jump on the bandwagon noting that the GOP's proposal is yet "another assault on the middle class, seniors, and our future."
Exactly -an assault on the middle class.
Willis believes "that taxes shouldn't go up on anybody right now. Growth is sluggish and anemic so the prospect of tax hikes don't make sense, especially on those the president purports to protect."
I agree. What you want to do is improve growth. Do that and you have improved employment.
That, in turn, takes more people "off the dole and leads to higher receipts," Willis added.
Half of Every Dollar Earned?
But how high should taxes go, and who's going to pay them?
For some reason, corporate taxes are strangely missing from the entire discussion.
According to the United States Office of Management and Budget (OMB), the 2013 fiscal year budget calls for $237 billion in corporate income tax revenue against individual income tax revenue of $1.165 trillion.
If you add in Social Security and other payroll taxes, individuals are on the hook for more than $2 trillion in taxes, or 81.25% of all revenues the government intends to collect.
Very few corporations actually pay the often demonized 35% U.S. corporate tax rate. In fact, the average U.S. corporation pays just 12%. Many don't even pay that.
Instead they use legions of lawyers and thousands of foreign subsidiaries to pay taxes only when they bring them home and repatriate their profits. Or, they stage a tax rebellion of sorts.
Willis believes that the White House doesn't grasp the fact this is already well under way as companies like Oracle, Costco, Wal-Mart and more than 200 others rush to pay dividends early with the express purpose of avoiding tens of millions of dollars in higher taxes that presumably lie ahead in 2013.
Adding insult to injuries the struggling middle class has already sustained, what these companies are doing is "all very quiet and perfectly legal," she observed.
If only the middle class had that option.
Let's just hope it's not half of every dollar earned.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
Hi.
Since I am Swedish, I wish to welcome you to the "Swedish tax model" which burden we have been carrying since the 60's. Also see where it has taken us; Nowhere!
Sadly, I can't seem to argue "with your math".
What garbage!
Truth hurts… doesn't it…
I agree with Coburn – no deal is better than a bad deal – it's the only way to get any cuts from the socialist regime, lower the deficit, and stop this policy of trying to make the world be like us, which always backfires and leaves us with more enemies.
Good points, Rorio.
If you subscribe to Private Briefing, check out today's (Friday's) column, which is also about the fiscal cliff. In it, Martin Hutchinson builds on the point that Keith made here and notes (as you do) that no deal (an impasse) may be the only way that we'll make a serious attempt to cut the deficit.
There will be fallout from such cuts, to be sure, but the long-term health of the country will be much, much stronger.
In the Private Briefing piece, we detail several moves you can make to protect yourself and even profit from the "fiscal cliff."
Thanks for posting…
Respectfully yours;
William Patalon III
Executive Editor
Money Morning and Private Briefing
I'm ready to go over the hill, you say cliff, making it sound like a steep drop, well we voted for it and the majority of Americans decided on it and we need to follow through, anyway the Republicans are finished, it will make it that much more easier to rid our selves, of these bunch of triators.
Ricardo You are a Moron. The Democrat's have had more control of the Federal Government far longer then the Republicans. They could have fixed things decades ago but they are only looking out for themselves. There are more ultra Rich Democrats than Republicans. Charley Rangel, Tim Geithner, Tom Daschele, None of them paid their taxes. Nancy Pelosi says it is ok for members of Congress to use insider trading but the private citizen can go to prison for the same info. They should all be thrown in Jail with Bernie Madeoff
A PERFECT DICTATORSHIP: One Party Government
Republican members of Congress should recall former one term president George H. Bush's famous (last) words: " Read my lips, no new taxes". He then betrayed his base and raised Federal income taxes in exchange for spending cuts later ( they never happened). Like cartoon character Whimpy, he gladly took his hamburger now for payment tomorrow.
As you know, he lost the election for a second term. So, if the current Republican Congress passes tax increases or otherwise allows income taxes to go up, then they will take most of the blame in 2014 and 2016. Better get ready for a one party government in that event.
Dear Ricardo:
Thanks for the comments. As I mentioned to Ricardo above, today's Private Briefing builds on the excellent analysis that Keith provides here. In the PB column, another of our experts (Martin Hutchinson) talks about the unseen benefits of the fiscal cliff. And for investors who predict the scenario that you seem to expect, we also detail the moves that can be made now for protection and profit.
I wanted to make sure that I passed that along, since you took the time to post, and since you've obviously put a great deal of thought into your comments, too.
Thank you for doing so. By and large, we've got a highly informed and very engaged readership here at Money Morning. The experts and I feel very fortunate to have that be true.
Respectfully yours;
William Patalon III
Executive Editor
Money Morning & Private Briefing
Ricardo,
People like you are the reason why we got stuck with another 4 years of crap. Judging by your name you probably don't even pay taxes like the majority of your race. So ya, why would you care. Free load off the hard working Americans like the President allows you too. What a joke!
While your at it, why not add another 20% for tips when you go out to dinner. OH MY! Im being taxed 70%!
Oh wait back to reality. How about staying closer to facts. 28% will be missing from your pay check, not 50%.
This Gerri Willis is an idiot. The tax burden on middle class American is not 43.12%. The marginal tax burden *might* be 43.12%. I am in that middle class, as defined by most. (and I prepare tax returns) My effective tax rate is 10%, add in FICA taxes, sales tax, etc. and my tax burden is about 26%. Way too high, but not HALF of my income! The problem we have in this country is mis-information. We cannot even agree on the numbers or definitions…how can we solve the problem?
My marginal tax rate is 25% but just barely. How do we call someone like me who makes twice the median househould income "middle class?" Middle class to me is people who make around the median, or $50k. I am much more than middle class and I don't pay the rates the liar Willis states. I get so sick of hearing the "experts'" "analysis."
I only know about taxes and how they lie about them. (even "non-partisan" groups.) I shudder to think about the lies told about entitlements and spending. Then, I am expected to make intelligent informed voting decisions….ugh.
At some point, which varies by individual, the effective tax rate makes continued laboring for self and family fruitless. Just to be alive another day is not a compelling reason to continue and to generate tax revenue with one's life blood for a deaf uncaring government. Failure will follow painful decades.
If you look at all the other taxes, such as sales tax, property tax, capital gains tax, tax on interest earned, taxes collected as an aggregate are indeed much more than 28%.
who could possibly argue with someone who works for Faux?
You shouldn't worry over much about high stated tax brackets, because during the entire Twentieth Century the wealthy never paid more than 20%, in fact many paid much less, because there are so many tax loopholes for investors, and there are more tax loopholes today, than in the past; but the rich resent the fact, like death and taxes, of having to lock up so much of their wealth in tax shelters, when they could be swinging around and painting the town!……………eric wynne taylor
I think we should go over the cliff… why, our Federal Government loves to spend and tax. Obama wants to raise taxes and Boehner wants to do away with loopholes… both are taxes… both will punish everyone! We're going to go over this cliff. Lets do this now or later.
Other than the corporate bailouts that have happened over the last few years, it has been the middle-class that has been the beneficiary of the government's spending. It's time to pay the piper. It's gonna hurt, no doubt about it. But look at the pain that Iceland went through when they had to virtually declare bankruptcy. The pain only lasted a couple of years. And now it's the U.S.'s turn to bite the bullet. It is inevitable that the U.S. is going to have a recession and the further down the road that the can is kicked, the worse it is going to be. So get it over with now. In two or three years the country will come out on top and the populace will have learned a lesson about frugality and hard work and innovation.
CONGRESS LOOKING FOR "TEAM PLAYERS"
Look, we voted twice for this President and this Congress, so we should NOT be surprised at the results: More spending ($45,000/second), higher taxes, more debt, etc. The political rhetoric has not diminished in the slightest either.
Speaker Boehner reportedly just removed a number of Tea Party congressmen from their leadership roles on select committees, such as finance. He said they were not being "Team Players". Apparently Speaker Boehner does not want them to get in the way of his pending "deal" with President Obama. We may avoid the "cliff" but we surely won't avoid higher tax rates and less net income in 2013.
Whether "taxing the rich" solves our budget problem or not is really not relevant in political circles or government today. Current policy reflects the negative mood of America and the fact that the vengeful millions want to get back at the creative minority who are the most successful in our capitalistic system. Needless to say, we are all going to become the losers when the dust settles. That's the way it goes.
"… the creative minority who are the most successful in our capitalistic system."
You wouldn't be talking about the "Job Creators" and our crony capitalist sytem? Their success in improving the living standards of the majority of working Americans have been truly abysmal.
No one in this country, Gates & Buffett included, pays 50% of their income in taxes (or will in the future). Most Americans don't understand marginal tax rates, especially those grinding axes. It is fine to argue over taxes and tax rates, but please acknowledge that effective tax rates are much lower than marginal ones. Keith understands this when he talks about corporate taxes which, despite all the kvetching, are quite low. While individuals don't have the white pages sized list of deductions that corporations do, they still don't pay marginal tax rates. The middle class (not that there is any agreement on what level of income that defines) likely falls into the 15% effective tax range (pre-EGGTRA rates). For those that use tax software, take a look at the effective tax rate calculated and be amazed how much lower it is than you thought. Go to the tax foundation site that Keith references and see that the top 1% paid effective rates of 23.39%
'nuff said
How long have we been talking about this – the fiscal cliff. All the articles that have been written about it and all the experts that have given us their opinions on the financial networks have not change a thing. Just maybe the public questions their wisdom – they all have the same opinion and what is driving that anyway. The Republican Party tried to make it an issue in the election and they lost. Let the changes take place on January 1st and start fresh working on the problems that are addressing this Nation of ours. Maybe once we are in the middle of it we can address solving the problems and stop trying to scare the public into thinking the world is coming to an end.
There are only two sureties in life. DEATH and TAXATION.
I will continue to pay whatever taxes are taken from me by our goverment,
because I am sure not ready for the other alternative at this time
Gary,
your argument doesn't hold water. You are implying that not paying taxes automatically leads to Death. Sure dying means you don't pay any taxes but the relationship doesn't hold in reverse.
These guys all talk about the rich. Has anybody bothered to ask how much the Obama's have made last year? How about Pelosi, how about Reid et. al. Funny how these guys have made millions, yet they don't include themselves. I wonder how much income tax Obama et al paid last year. Oh that's right, they are exempt. How about Bernake? how much did he pay? Actually he would be paying it to himself, since the Federal Reserve is neither Federal, and their reserves are dubious to say the least. They buy up the debt they create with the money they print for nothing? We would go to prison for that. But there are guys like Mr. Martinez, who has no idea what is going on, as long as he gets his, who gives a crap, right?
Even if Obama gets his way many Canadians look on the USA as an attractive tax haven, especially for the rich. My warning to the Republicans is never get in a game of chicken with someone who has nothing to lose and Obama, who cannot run again is in a position to obtain immense satisfaction in playing " I would rather be right than President". In Canada we are at close to 50% on income over 86,000, we have our old age secuity completely clawed back at around the same figure, we have no deductions for interest on mortgage, property taxes, tax-free mortgage bonds etc., we do not tax capital gains at a flat rate which discriminates against lower income levels, but instead tax half the capital gain at what ever graduated rate you fall into. But, we are smarter in one respect…we barely tax corporations at all and are on path to eliminate same, and we don't tax the same dollar of income twice like you do and was the reason for the Bush reduction to 15%….we get a substantial dividend tax credit in recognition that the corporation has already been levied tax on the source of this income…until Bush you people paid tax on dividends at the same rate as interest….go figure !….and since the corporation got a tax deduction for interest no wonder they never paid any dividends….BUT, the true value of a corporation (mature) is the present value of future dividends and thus many of your companies, regardless of earnings are shunned by us since they don't pay dividends and they are stupid enough to boast about it.You share the profits with the owners or your stock is spurned by most Canadian and British investors.
The "math" is nonsense.
Willis is treating the marginal rate as the rate for a person's entire income.
You know, the rate charged on income after all deductions.
Stupid!
hoping that they can come up with a real resulotion to this matter a fiscal cliff…i have agreat confedince that our great leader could tackle this issue… and move forward to our energy resulotion and fix American great economy and the market…this is peanut if they do cooporate one another…happy holiday… rise above…. boom bbcode…
cut government employment 33% at all levels…problem solved.
The math in this article is misleading. For instance:
1. The payroll tax of 15% is both the employer and employee share of taxes, roughly 50% each. This also has an earning limit of just above $110,000. The rate then drops to 2.9% for earnings above $110,000.
2. The federal tax rate increase to 28% is also the marginal tax rate at which earning above a certain level will be taxed, not every dollar of income.
Bottom line, a self employed individual making $500,000 a year currently pays an effective tax rate of roughly 28%, including payroll taxed and federal income tax. This is far cry from leading middle income people on to think they will pay 50% of their income in taxes. Most people do not understand the federal tax brackets and effective income tax rates!
I like the Romney tax plan better, only pay taxed in the years that you are running for office, shelter your money in the Camens and Switzerland, make fun of the poor, seniors, military who dont make enough money to pay taxes.
How much would we save if all those Bozos in DC would work at least one year for no pay. Who up there would be hurt one iota!