The Fiscal Cliff: Massive Tax Hikes Set to Hit in 2013
By Grover Norquist
When it comes to taxes, Washington, D.C., is now experiencing the quiet before the storm. Starting in early 2013, American families and small employers will face a list of tax increases so large that they cannot be ignored.
Adding together data from the nonpartisan Congressional Budget Office (CBO), it’s reasonable to say that these tax hikes will total $6 trillion to $7 trillion over the next decade.
President Obama talks a lot about raising taxes on “millionaires and billionaires,” but most of the tax hikes fall on households making $250,000 per year or less. Even raising the very top rate, something Obama has been pushing during his entire public life, would be a tax increase on small employers and families with taxable income of around $400,000 in 2013.
This is trickle-down taxation at work, and it’s coming to a middle-income family near you. President Barack Obama will have to go on record: Is he for this barrage of tax hikes, or is he against them?
Personal income and small employer tax hikes
The first series of tax hikes will hit personal income-tax rates. Because many small employers pay business taxation at these rates, this is also a tax-rate hike on small businesses.
The lowest personal rate will rise from 10 percent to 15 percent, and the highest rate will go up from 35 percent to 39.6 percent.
This means that every American with an income tax liability is scheduled to see a rise in taxes.
The majority of small employer profits face taxation at the top marginal tax rate. That means that the top personal rate is actually a proxy for the small business tax rate in America. That rate will rise from 35 percent to 39.6 percent.
Thanks to a provision in the jobs-killing Obamacare law (the Patient Protection and Affordable Care Act), most small employer profits will face a Medicare tax rate of 3.8 percent, pushing the total small business rate over the 40 percent mark.
Higher taxes on families and seniors
Families with children will see higher taxes. The “marriage penalty” (higher taxes for a married couple than an identical cohabiting couple) will return, hitting the first dollar of taxable income. The child tax credit will be cut in half, from $1,000 to $500 per child. For seniors, the top effective marginal tax rate on Social Security benefits will rise from almost 30 percent in 2012 to almost 34 percent in 2013. Social Security taxes also will rise.
Higher taxes on savers
Savers and investors are especially hard-hit by the scheduled tax hikes. The top rate on long-term capital gains is set to rise from 15 percent to 23.8 percent. If you receive dividends, the top rate on this income will rise from 15 percent to 43.4 percent.
The Tax Foundation reports that 70 percent of taxpayers over age 55 reported dividend income, earning 71 percent of the total dividends in America.
Death tax on the middle class
The death tax is set to go up, both under current law and in President Obama’s budget. Today, the death tax rate is 35 percent and there is a “standard deduction” of $5 million ($10 million for married couples and widows). In 2013, the rate will rise to an astonishing 55 percent, and the deduction will fall to only $1 million.
Even under Obama’s budget, the rate will rise to 45 percent and the deduction falls to $3.5 million.
Obamacare tax hikes
There were 20 new or higher taxes in the Obamacare law, at least seven of which fall on households making less than $250,000 annually.
The Obamacare law’s tax hikes have already partially taken effect. The 10 percent “tanning tax” has been on the books for two years.
Since 2011, we haven’t been able to use our health savings accounts (HSAs) or flexible spending accounts (FSAs) to purchase non-prescription, over-the-counter medicines (the “medicine cabinet tax”). Those under 65 taking non-medical withdrawals from an HSA now face a surtax of 20 percent for doing so. There is a new 3.8 percentage point “surtax” on investment income in 2013.
This will apply to interest, dividends, capital gains, annuities, rent, royalties, and investor income in partnerships and Subchapter-S corporations for households making more than $250,000.
Connected to this, the top FICA rate for Medicare Part A will rise from 2.9 percent to 3.8 percent for these households. Together, this is a tax rate hike on all small employer profits.
If you have an FSA at work, and you use it for large medical expenses (like special-needs education, durable medical equipment, etc.), you will find yourself locked out in 2013. Currently unlimited by tax law, there will be a new $2,500 cap on FSA deferrals. This is a cruel tax increase on those who can least afford it — those with high medical bills.
Connected to this is an increase in the “haircut” that must be applied to medical itemized deductions. Under 2012 rules, itemized medical deductions must be reduced by 7.5 percent of adjusted gross income (AGI).
In 2013, this will increase to 10 percent of AGI. This will be a tax hike for seniors with high medical bills and those dealing with the high out-of-pocket costs of chronic illness or long-term care.
And there will be a new excise tax on medical-device manufacturers, driving up the cost of every wheelchair, pacemaker, and hospital bed. It’s also a jobs killer, since America’s 6,000 medical device companies employ 360,000 people.
Obama’s ‘Buffett rule’ is another AMT
President Obama wants a “Buffett rule” to ensure that those making more than $1 million pay a tax rate of at least 30 percent.
This is on top of the dreaded “alternative minimum tax” (AMT), which is scheduled to affect 30 million people in 2013 (up from 4 million).
That’s still not the end of it. The president also wants to raise taxes on energy companies, driving up the cost of electricity and gasoline for every family and small employer in America.
During this election season, Obama needs to answer this question: Why do you want to raise taxes in every imaginable way when our economy is weak and millions of Americans are looking for jobs?
Mr. Norquist is president of Americans for Tax Reform (ATR), a taxpayer advocacy group he founded in 1985 at President Reagan's request.