Deflating the “Fiscal Cliff” Hype

Both those proposing to end the Bush tax cuts only for those earning over the $200,000 and $250,000 thresholds, and those wanting to extend all the Bush tax cuts, are engaging in exaggerated rhetoric. President Barack Obama is arguing that middle-class families will get an average $2,000 tax increase and those who want to continue the tax cuts for all taxpayers are emphasizing the devastating effect on small businesses and on job creation. A vox on both camps.

Obama is ignoring the 47 percent of potential taxpaying households who do not pay any federal income tax, according to the IRS’s latst complete data. Although some in that category will fall out of that 47 percent category if all the Bush tax cuts expire, many others will continue to not pay federal income tax. Having more households pay federal income tax is conducive to fostering a “we’re-all-in-this-together” spirit.

Those working minimum-wage jobs and even those low-income workers earning twice the minimum-wage will not see a $2,000 increase in their taxes if all the Bush tax cuts expire. A $2,000 tax increase for those households earning a income measured in six figures will not cause a significant change in lifestyle.

If tax rates are increased only for those who have taxable income over the $200,000 and $250,000 thresholds, the impact will not be substantial. These households will retain the Bush tax cuts up to the thresholds and will see, at the very most, a tax increase of four percent for any taxable income over the thresholds. Therefore, a household of more than one person will pay $4,000 more in taxes on taxable income of $350,000. Similarly, a household earning $500,000 in taxable income will pay $10,000 more in taxes, less than the wage cost of one minimum-wage worker. Owners of small businesses hire much more on the basis of consumer demand than they do based on taxation and/or government regulation.

In a prior blog I made the case that in regard to the federal income tax we are not an overtaxed nation. A significant increase in the minimum-wage and an increase in the unionized workforce will do much more to reduce the economic imbalance in the nation than will attempts to cut taxes or continue tax cuts that, by law, are due to expire.

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