Wednesday, December 5, 2012

The Fiscal Cliff

What we know about the so-called fiscal cliff is this: Come January, if Congress and the White House don’t agree on a fix, $607 billion in automatic annual tax increases and spending cuts kick in What we don’t know is what exactly that means for your wallet.

If lawmakers can’t get their act together before Dec. 31 and the U.S. goes off the cliff. Under that scenario, the tax bill of a person earning $50,000 and filing as a head of household will go up by $1,635. A married couple earning $80,000 and filing jointly will see their tax bill spike by $3,517.

The calculator put out by the Tax Foundation, a Washington think tank, estimates how people will fare under three scenarios that are being negotiated in Congress. The first scenario is that we tumble off the fiscal cliff and the Bush tax cuts automatically expire. The

second is the Republican scenario, which assumes lawmakers avert the cliff and there’s a permanent extension of the Bush tax cuts. The third scenario, Obama’s proposal, assumes that the cliff is avoided, the Bush tax cuts expire for the highest earners but not for everyone else, the payroll tax holiday for employees gets extended one more year, and the Buffett Rule goes into effect. According to this calculator, a single person earning $50,000 will pay an effective tax rate of 21 percent ($10,313 in taxes) if the U.S. goes off the cliff, 20 percent ($9,753) under the Republican proposal, and 18 percent ($8,753) under the White House plan. This calculator also has features that will please the die-hard wonks who want to tool around with even more complicated outcomes.

Paycheck City, a website that compiles payroll calculators, has its own fiscal cliff scenario tool. This tool (above) is the most visually appealing but is really intended for employers making payroll decisions.

The Tax Policy Center’s calculator says it’s for the general public, but only people whose jobs require that they know the ins and outs of the budget negotiations in detail should brave this one. If you’re an accountant, congressional staffer, journalist, or just a glutton for pain, this tool is great, because it offers a ready-made cheat sheet on the Republican and White House tax plans.

For everyone else, stick to the calculator on As it is, this stuff is already headache-inducing.

While the concept behind these tools is commendable—this may be, after all, the most complicated budget negotiation since the Stamp Act—they dramatically oversimplify what’s actually at stake here. For one, they tell people how their tax bill might change but don’t capture the other side of the cliff ledger: spending cuts. If you work for a defense contractor, your job may be wiped out by a contract being severed. Ditto for teachers if education spending cuts kick in. And if the tax code gets restructured entirely, these calculators will be moot. There a lot of moving parts in this game, and it’s nearly impossible to keep track of them all.