How can the same piece of legislation be scored as both a $3.9 trillion tax cut and a $620 billion tax increase? It all depends upon your frame of reference.
At about 2:00 a.m., January 1, 2013, the Senate passed the Taxpayer Relief Act of 2012 to avoid the “fiscal cliff” that had been set in motion in 2001 and renewed in 2010. Some 21 hours later, the House adopted the bill without amendment and sent it to the President. A cascade of tax increases thus was avoided.
Compared to the baseline of the 2012 tax law, the new legislation is projected to add $620 billion in tax revenue over the next ten years. But compared to the enormous tax increases that had been
scheduled by prior Congresses, the new law is a tax cut. Most of the “foregone revenue” is attributable to finally adding a permanent inflation adjustment to the Alternative Minimum Tax (AMT), eliminating the need for annual “patches.” The irony is that Congress never intended to collect those taxes, but each year the “patch” would need to be offset by other tax increases.
Key elements of the new law:
The narrow difference in the thresholds between singles and marrieds is an implicit return to the “marriage penalty tax” for top earners. Two singles who each have $400,000 of income will not be affected by the 39.6% tax rate. Should they marry, $350,000 of their income will be taxed at that rate, an extra $16,100 in taxes. In contrast, the new law preserves the provision of the Bush tax cuts that set the standard deduction for joint filers at double that for single filers.
Higher tax rates mean that tax planning and tax-conscious investing will become more valuable that ever before. Tax-free income from municipal bonds will become even more attractive. The fact that the increase in dividend taxation is far less than it could have been should keep dividend-paying stocks attractive to many investors.
The larger question is: Will the tax increase have an impact on the still-fragile economic recovery? That will be one of the major stories to follow in 2013.
© 2013 M.A. Co. All rights reserved.