On The New Definition Of "Rich", A $620 Billion Tax Hike Offset By $15 Billion In Spending Cuts, And Much More

Tyler Durden's picture

We greet the new year with an America that has a Fiscal Cliff deal. Actually no, it doesn't - not even close. What it does have is an agreement, so far only at the Senate level which voted a little after 2 AM eastern in an 89-8 vote (Nays from Democrats Bennet, Cardin, Harkin, and Republicans - Lee, Paul, Grassley, Rubio  and Shelby), to delay the all-important spending side of the Fiscal Cliff "deal" which "can is kicked" in the form of a 60 day extension to the sequester, to be taken up "eventually", but hopefully not on day 59 at the 11th hour, the same as fate of the all important US debt ceiling, which remains in limbo, and which now effectively prohibits America from incurring any new gross debt as the $16.4 trillion debt ceiling was breached yesterday. In other words, America's primary deficit sourcing mechanism is now put on hiatus, and all new net debt will come at the expense of defunding various government retirement funds as the 60 day countdown to the real showdown begins: the debt ceiling, as well as the resolution of the spending side of the Fiscal Cliff deal.

What did happen last night was merely the legislating of the inevitable tax hike on the 1%, which was assured the night Obama won the presidential election, something not even the most rabid Norquist pledge signatories had hope of avoiding. This was the first income tax hike in nearly two decades. A tax hike which, regardless of how it is spun, will result in a drag in consumption. It was also the brand new definition of rich, with the "$250,000" income threshold now left in the dust, and "$400,000 for individuals ($450,000 for joint filers)" taking its place. If you make more than that, congratulations: you are now "rich".  You will also be hated for being part of the 1%. and be the target in the ongoing class war.

Who knew that "New Normal" would also bring us the "New Rich" definition.

Ironically, not even the tax hike component of the deal was fully worked out, as it still remains unclear just what the new tax brackets and what the tax increases for the much maligned 1% will be.

What is generally known is that the Senate bill boils down to the following: $620 billion in tax hikes over the next decade offset by $15 billion in spending cuts now. Hardly "fair and balanced." Anyone who, therefore, thinks this bill is a slam dunk in the House is a brave gambling man.

The said, the "good news" is that 99% of Americans will see no change in their taxes, as was the idea all along. And the evil 1% will get their just deserts, which was the whole purpose of this relentless soap opera

The bad news is that starting today millions of wage earners, will see a smaller paycheck as a result of the lapse in the 2% payroll-tax cut, enacted in 2010, which lowered the employee portion of the Social Security tax from 6.2% to 4.2%. The direct cost of the payroll tax expiration will be $125 billion per year, or nearly a full percentage point of GDP, and in practical terms, an individual earnings the maximum cap of $113,700 (for 2013), will see their paycheck drop by $200/month.

That's just the beginning. The WSJ details the various other implications of the expiration of the payroll tax cut:

It will take up to four weeks after a bill is passed for many workers to know exactly what their 2013 take-home pay will be, according to Michael O'Toole, an official of the American Payroll Association, a group of 21,000 payroll managers.


Just before midnight, the Internal Revenue Service issued new withholding tables for 2013 reflecting the expiration of the 2001-3 tax cuts and the two-percentage point Social Security tax cut. But the IRS noted that the tables might change given pending legislation.


The 2013 tax-filing season also is likely to be disrupted by Washington's wrangling on deadline. In November, acting Internal Revenue Service Commissioner Steve Miller warned that the filing season would be delayed by several weeks. Normally the season opens in mid-January, but this year it may be delayed till mid-February or later.


As a result, many filers won't be able to receive tax refunds as early as they normally do. "Congress's delays have pushed back the repayment of interest-free loans to the government for millions of taxpayers," said Lawrence Gibbs, a former IRS Commissioner now with the Miller & Chevalier law firm in Washington. The average refund is approaching $3,000, according to IRS data.

So very much still remains unknown. Here is what is known on the tax side of the "deal":

Income-tax rates. The top rate on ordinary income such as wages for joint filers earning more than $450,000 ($400,000 for single filers) would rise to 39.6%. Current law would be permanently extended for income earned below that level. Left unclear is whether the $450,000/$400,000 threshold refers to adjusted gross income (AGI) or taxable income. AGI doesn't include subtractions for itemized deductions, while taxable income does.


The individual income tax is the government's biggest single source of revenue, supplying nearly half the total.


Investment tax rates. For joint filers with income above $450,000 ($400,000 single), the top rate on long-term capital gains and dividends would rise to 20% from 15%. For taxpayers earning less than the thresholds, there would be a permanent 15% top rate on long-term capital gains and dividends, except perhaps for the lowest-bracket taxpayers, who currently have a zero rate.


Alternative minimum tax. The bill permanently and retroactively adjusts the alternative minimum tax to stop it enveloping more taxpayers than designed. The current fix expired at the beginning of 2012.


PEP and Pease provisions. The deal restores and makes permanent two backdoor tax increases for joint filers with incomes above $300,000 ($250,000 for singles).


When it was last in effect, the Personal Exemption Phaseout reduced or eliminated the value of personal exemptions for taxpayers earning more than the income threshold. The Pease provision—named after the late Rep. Donald Pease (D., Ohio)—reduced itemized deductions for taxpayers above a certain threshold. The formula's net effect was to add a bit more than 1% to the top tax rate, says Mr. Williams of the Tax Policy Center, including the top rate on capital gains.


Estate and gift tax. The estate and gift tax exemption would remain $5 million or more per individual vs. the $3.5 million sought by President Obama. But the current 35% top tax rate on amounts above the exemption would increase to 40%.


Tax "extenders." This term refers to several provisions that lapsed either at the beginning or the end of 2012. They would be extended for varying periods, and provisions that expired in early 2012 would be extended retroactively. Among these provisions are deductions for $250 of teachers' classroom expenses; state sales taxes in lieu of state income taxes; tuition and related expenses; a conservation donation benefit; and the direct charitable contribution of up to $100,000 of IRA assets for people 70½ and older.


The deal would also extend for five years the American Opportunity Tax Credit; for many taxpayers this dollar-for-dollar credit is worth up to $2,500 and therefore the most valuable education benefit. And it would extend for five years the current versions of the Child Tax Credit and Earned Income Tax Credit, which are claimed by many lower-income workers making up to about $50,000.


Depreciation. A one-year extension of current "bonus" depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate. "This will be very helpful to a lagging economy," says Don Williamson, an accountant who also heads the Kogod Tax Center at American University.

In other words: congratulations America, you have a Fiscal Cliff deal. Oh sorry, no you don't. But it does make for even better political grandstanding and melodramatic theater.

And now, we look forward to late February, early March, when as we said all along, the real showdown will take place, one which the market will no longer be able to avoid.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
AlaricBalth's picture

This has been nothing but Kabuki Theatre. The appearance of an uncertain outcome during this farce, when in fact the politicians have worked together to determine the outcome beforehand.

This whole fiscal cliff fiasco has been a contrivance to further advance a false left/right paradigm. These so called lawmakers have basically decided not to decide. Kick the can down the rode again. They know the American people are more interested in watching Dancing with the American Idol starring Honey Boo Boo, and obviously know they can get away with fleecing the public

mikla's picture

This will destroy S-Corp (small business) tax-return-filers.

Note that I didn't say "decimate", because that implies a mere destruction of 10%.

Further note:  Tax rates (being played with here) and tax receipts (pretended to grow here, but that's quite unlikely) have absolutely nothing to do with government spending, the debt, and the fiscal cliff.

Punishing work is absolutely crazy, negative in every possible way for society and prosperity.  The income tax itself is batsh*t stupid.

Cursive's picture


How so?  I find the whole tax code odious, but how do these provisions target S-corp filers?  They could always revoke the S election, too.

mikla's picture

Because S-corp includes the business profit/loss on the personal return (there is no filing for the business separately), a small-business owner receiving $50K in "income" (salary+ bonuses) would appear to *also* have received all of the profits from the business, even though the small-business-owner did not actually receive that money to buy yachts (that money is re-invested into the business, and not actually received as "income" to the owner; but it is considered income, so it is taxed).  

This is especially important/painful to any small-business that needs to build a "capital-reserve", since any "lines-of-credit" from banking institutions to small businesses are no longer reliable (cannot be gotten, nor trusted, because they are commonly being "withdrawn" by the bank without notice and for no reason).

Note that C-corp Google and Apple don't have this problem -- they can move the business income to ensure that it is not "received" (is not counted as "dividend" nor "profit"), and thus not "taxed".

Yes, many small businesses might be able to move from S-corp to C-corp, with restrictions, and expense (different and more costly rules now apply), but not retro-actively.

This is probably part of the intended effect.  The current government *hates* small business, because only "large" businesses hire lobbyists.  Large businesses are easier control, and to shake-down for cash.  (I'm not joking here.)

AlaricBalth's picture

If you are interested in looking through the actual bill which passed the Senate, here is the link. http://thomas.loc.gov/cgi-bin/query/D?c112:4:./temp/~c112oifWqi::

Of particular interest is the extension of significant tax breaks for multinational corporations domiciled in the US.


The following link explains how this works in terms even I can understand.


boogerbently's picture

Will all "new" tax revenues be dedicated to paying down the deficit?

THAT is the problem/solution.

jekyll island's picture

It's all good.  I was born poor and I still have most of it left.   

mikla's picture

"Will all "new" tax revenues be dedicated to paying down the deficit?

THAT is the problem/solution."

This is a misunderstanding.

(1) Tax receipts will go down.  There won't be any "new" revenue (there will actually be less).

(2) For every "pretended-$1" in new "revenue" (which will likely not happen), there is $41 in new spending.  This permits the deficit to grow faster-than-ever.

(3) Understand "fungible".  Even if there is "net-increase-in-receipts" (there won't be), it won't be used to pay down the deficit.

(4) The deficit cannot be reduced.  It is mathematically impossible under all scenarios.  The reader will need to understand the concept of "exponential-math", and how "ponzi" works, and why the conclusion cannot be avoided under any scenario.

(5) The default has already occurred.  What remains is:

(a) accounting (there currently is none);

(b) explicit selection of winners-and-losers (e.g., we have a "command/fascist" economy);

(c) a step-function change in behavior by the public.

In short:  This bill doesn't matter, whether it passes or not.

fattail's picture

(2) For every "pretended-$1" in new "revenue" (which will likely not happen), there is $41 in new spending. This permits the deficit to grow faster-than-ever.

Excellent...  Full speed ahead, default into the financial abyss.  I am tired of waiting, and watching these political half measures impede this ridiculous slow motion farce of a government and country from the desitiny it deserves.

derek_vineyard's picture

a president would take this legislation and tear it up on live TV and demand a balanced budget

jumbo maverick's picture

No a LEADER would tear up the legislation on live TV and demand a balanced budget. There are no leaders in DC only thieves.

true brain's picture

It matters to the algo and the sheeple, the RINO, the socialists, the status quo, and the great pretender. If Obama the great pretender is not so deceitful, he would know that there is no such thing as soaking the rich. The top 1% pay 13% effective rate or even less (talk to Buffett), trying raising that you dumb SOB. They owe you no matter what you do. Step out of line and you'll see.

Cursive's picture


Thank you for elaborating and I agree with all of your points, though, I never understood why a capital intensive business would elect for S-corp filing.  Still, the extension of bonus depreciation should help all business who are making capital investments.  This discussion underscores the root problem - the tax code is too big and too onerous.  It stifles productivity.

mikla's picture

Agree with you too, in theory, "big-business" or "capital-intensive" business might be better as a C-corp or something else (LLC, etc.).  However, any more, pretty much *all* small businesses need to "play-with" lines-of-credit in at least six-figures (especially given the rising cost of fuel and commodities, and the debasing of the currency).

The goal with "S-corp" was to allow for "easy-start, easy-run" businesses by Mom&Pop.  However, stocking shelves or getting suppliers means even the "piss-ant-little" businesses are probably moving several-hundred-thousand in cash each year.  Even $1M in "gross" is a really small business.

Try the Family-Farm:  A "good" year and they may "net" $850K.  A "bad" year and they may lose $350K.  Those guys are totally screwed by this.  And yes, I'm talking about the "Family-Farm", that employs Dad, two kids, and one "hired-hand".

I expect we will continually see the "lowering-of-the-bar" to ensure S-corp makes no sense for anyone in the future.

francis_the_wonder_hamster's picture

"Still, the extension of bonus depreciation should help all business who are making capital investments"

I hope we can agree that the entire purpose of accelerating bonus depreciation was to pull forward spending so as to goose GDP (and help BO get re-elected)?  Same con was used to increase current year taxes by allowing roth IRA conversions to be taxed over two years.  You pull tomorrow's revenue into current year, and the CBO somehow doesn't account for future tax revenues that are now gone.  There are numerous examples, but they are all part of the can-kicking game.

Personally, I can run my business as an S-corp, C-corp, or as a 1099.  According to my spreadsheet, the changes make it cheaper to file as a 1099 and dissolve the corporation (as was intended).  Or I could just leave the country.......

(Note: referenced spreadsheet takes into account how bad California gets to screw me starting......today).

My Days Are Getting Fewer's picture

small-business needs to build a "capital-reserve"


This is correct.  But, the only way to do this is to take all of the profit as personal income and tax it.  Then, you stockpile cash or gold personally.  Or, you set up a LLC or other entity to invest the money in something you can depreciate - real estate, capital equipment, etc.

If your small business needs money, you loan it personally or from a related entity.


My "C" corporation is a "personal service" enterprise.  All net profit is passed through to me for tax purposes.  In running my small business for 30+ years, I have used LLC's for unrelated investments.  Yes, it takes a lot of time to administer all of this and comply with tax-filing requirements.  But, it is worth the effort.



autofixer's picture

My small business, an auto repair shop, employeed 7 and grossed $750,000 per year. I operated on margins of 5 - 10%; people are price sensative and will always go to the lying alcoholic down the street if he quotes them a lower price.  I was a S Corp LLC and would have been flogged by the new tax rates.  Thank goodness I sold my business years ago.  I would be on my way out of business, due to rising costs and these tax rates.  P.S. The guy who bought the business from me, did go out of business.    He and I are rich by this new definition.  Huum, who knew?  

lynxminx's picture

This is false.  Losses and business expenses are deducted from profits before "adjusted income" is assessed on small businesses.


More to the point, these same businesses paid this tax rate throughout the nineties.  There was no apocalypse, nor was there a consumption freeze.  It isn't a "hike", it's a lapse of cuts that were supposed to be temporary in the first place.

mikla's picture

The assertion is that "adjusted income" as "profits" cannot be accumulated within small businesses (S-corp) without being taxed (unlike for C-Corp).

This lowers the risk-adjusted return for small businesses, especially those with high annual variability (see the "farmer" example in this thread).  The net-effect is that small-businesses have reduced ability to "buffer" their capital reserves (and access) from one year to the next.

Apple and Google can accumulate "un-taxed" cash reserves.  S-corps cannot.

Agree that expenses can be deducted (at some level, although this also is under review).  Agree that this doesn't (in itself) imply apocalypse.

However, the assertion is that the "increasingly-limited-upside" for S-corp, with an un-bounded-downside, and unquantifiable risk (e.g., "Obamacare" and employee regulations), imply many of these businesses no longer make sense.  This is quite different from the nineties.  As a further example, the withdrawal of "lines-of-credit" alone makes this scenario *very* different from the nineties.

And yes, the assertion is still that this impact is at greater-than-decimation levels (i.e., greater-than-10%).

Regarding the "no-consumption-freeze" in the "nineties", remember that was the era of the "explosion-of-leverage".  We are now doing the "opposite" of that for S-corps.

Jon Bong Jovi's picture

Any small business owner knows BO is full of crap. He doesn't care about small business, his actions are more than sufficient evidence. Bail out big business and shove it to the little guy repeatedly with a giant dildo sans lube. 

Fredo Corleone's picture

Is this Senate "deal" not essentially the very same proposal which Geithner presented to McConnell several weeks ago -- the proposal at which, McConnell ostensibly "laughed" in Geithner's face ? Rank, guffawing hypocrisy, or circumferent political fear ?

Who is laughing now, Mitch ?

Bee's picture

The laughing was because Geithner also asked for Congress to give authority of raising the debt ceiling to the White House.  He was asking Congress to abdicate responsibility and checks and balances, giving the White House a permanent blank check.  McConnell wisely laughed that off.

Jay Gould Esq.'s picture

Congressional responsibility; as in, passing continuing budget resolution upon continuing budget resolution -- never an official budget, mind -- thus placing a $16 trillion encumbrance squarely upon the national economy and the Taxpayer ?

SDShack's picture

The option Turbo Timmah presented was even worse than this abomination. it would make 0zer0 and all future presidents dictators because they would have unlimited spending ability via executive order.

Winston Churchill's picture

Bullish for C corporations.

Just take the income as dividends, just like Uncle Warren.

chubbar's picture

Can't S-corp filers take dividend disbursements as well? I thought that was the key difference between S and LLC (assuming that the owners claim the correct amount of wages earned from management, etc)?

Winston Churchill's picture

No, all income is subject to income tax.

The trade off for no corporation tax with limited liability.Same with LLCs.

In theory C corps pay tax on the profit that dividends are paid from.

In practise doesn't happen,think GE etc.


chubbar's picture

Not according to this article among many.

My understanding is that if you are an owner and take compensation based upon the work you do for the company and which passes IRS muster, excess profits can be distributed on a per share basis amongst all the shareholders and would count as dividend passive income, not subject to self employment tax and taxed at the dividend rate. Any accountants out there with opinions on this?

The most important features of the S corporation include the following:

  • limited liability for owners;
  • pass-through of income to owners, avoiding double taxation;
  • the business exists independent and separate from the owner/shareholders;
  • complex administrative operation--more forms and filings required, more formal meetings and record keeping requirements imposed (bylaws, meeting minutes, written resolutions, etc.);
  • profit-sharing restrictions--earnings distributed proportionate to capital contributions of shareholders;
  • flexibility in distributing earnings of the corporation by paying wages and salaries to owner/employees and passing-through other net earnings as passive income to owners. "


Zap Powerz's picture


thats just fucking great!  Im an S corp.  Fuck me.  Fuck me and marry me young.

This fucking cuntry is a fucking fascist state.  There is no opposition party.  The GOP and the democrats agree on everything important:  spying on citizens, confiscating as much of their wealth as possible, and restricting freedom.

Do you know whats next?  Gun control.  And those motherfucking smegma eating pederats republican dicks are going to vote for it. I see no way we avoid a civil war.  People are pissed and getting pissed"er" all the time.

Navymugsy's picture

Thank God somebody else knows that "decimation" implies wiping out 10% of something. Drives me nuts when they drop a nuke on London and they say it was "decimated".

Hobie's picture

Definition of decimate from the Oxford Dictionary:


Late Middle English: from Latin decimat- 'taken as a tenth', from the verb decimare, from decimus 'tenth'. In Middle English the term decimation denoted the levying of a tithe, and later the tax imposed by Cromwell on the Royalists (1655)

Historically, the meaning of the word decimate is ‘kill one in every ten of (a group of people)’. This sense has been more or less totally superseded by the later, more general sense ‘kill, destroy, or remove a large proportion of’, as in

the virus has decimated the population.

Some traditionalists argue that this is incorrect, but it is clear that it is now part of standard English.

Hobie's picture

So historically speaking, it's almost time for 90% of Americans to decimate the population. Starting with the 1 percenters. Trickle down decimation.

masterinchancery's picture

The fact that 30% of registered voters were dumb enough to vote for Obama, who is now a Lame Duck, did NOT assure any kind of deal, let alone the tax raising kind.  There will be blood in the House.

oldman's picture


Nothing to do with Kabuki at all, though there is an element of Vaudville/slapstick/keystone cops-----no, this is our turn to show the europeans how to really kick the can!

You remember how americans always do it better, right?    om

route40misery's picture

Haven't we seen this same movie again and again in Greece, Spain, Italy??? In their movie, they kick the can over and over and over and over.........  


Shitty movie by the way!

route40misery's picture

Haven't we seen this same movie again and again in Greece, Spain, Italy??? In their movie, they kick the can over and over and over and over.........  


Shitty movie by the way!

stinkhammer's picture
Pete and Repeat were in a boat. Pete fell out. Who was left?
Boilermaker's picture

Two wrongs never make a right.  But, three lefts do.

Food for thought.

HowardBeale's picture

Clever. About how things (legislation) get where they're going, as well...

TruthHunter's picture

"Two wrongs never make a right.  But, three lefts do."

Left the country...what other two lefts do you recommend?

Dingleberry's picture

Boilermaker, you forgot to turn use your "sarc on" key.

Compared to politicians.....I've seen better acting watching porn.

Snakeeyes's picture

Not a surprise, of course. Capitulation, no spending cuts. Railroad to hell.

Here is the bill. I stayed up until 2am to read it.


Boilermaker's picture

Well, it was New Year's Eve.  So, you only get partial credit.

Snakeeyes's picture

44:1 tax increases to spending cuts. And you thought Obama/Reid would EVER cut spending? Or McConnell?


SilverDoctors's picture

Kick the can. Is anyone surprised there are essentially no spending cuts?  Move along.
Meanwhile, trends forcaster Gerald Celente is calling for a full fledged World War 3 in 2013!

BlueCheeseBandit's picture

Predicting it or calling for it?

J in Vegas's picture

O.T. post but I need some help from the zerohedge collective hive mind. I got a letter from the California State Franchise Tax Board 2 days ago stating for the 2005 tax year I owe them $4,513.92 in back state taxes. Well I was just blown away. I moved away from Kommie Kali in march of 2004, and already did my tax return for the year of 2004. So I need some help. I remeber someone having this problem in the past on here and hope someone can help me with some questions......

#1 Can they audit you 8 years back?

#2 Can they give you $2100 in fees and interest but not tell you first that you owe money. This is my first letter in 8 years and they put me in collections now.

#3 What can I do? I went to their website, I'm going to sign up to access my old returns because who keeps 8 year old returns? I shredded all that crap along time ago. With the I.R.S. you are guilty until you can prove your innocence. So I need to prove that I didn't make that much money and don't owe this money. I only worked for three months that year and was working as a bartender making $7 a hour.

This is exactly the reason why I moved to Nevada with its zero state tax rate...

And this is the reason why people go all "Joe Stack" on the I.R.S.

J in Vegas

HowardBeale's picture

Put your head between your legs...or go Joe Stack. 


California is a full fascist state, all legislation written and paid for by the corporofascists out here. I have had your exact problem. They fucked me for every cent, though I was living abroad for 4 years--while they were sending armed agents to hunt me down at my old CA residence. 


OT: Just a year ago, while living back in the fascist hotbed, I bought a new motorcycle, stowed the old one in the garage, thus canceling the insurance on it. A week later I get a letter from the DMV telling me my registration (on the now-stowed bike; a registration which didn't expire for another 9 months) was canceled until I provided proof of insurance; in other words, if I wanted to pull the bike out of the garage and ride it, I had to go to the DMV and provide them with proof of insurance and pay to have my already-paid-for registration reinstated. I did nothing: Fuck you! 

Thus, I figure if they can cancel your registration anytime they want, why pay for it? Two months into the expiration period, the next year, I notice my paycheck is less than usual. Turns out they garnished my check for the registration fees, including lates fees.

Now understand this: They have now charged me almost double what the normal registration is for a bike that is stowed in the garage and for a bike that is still not insured; for an uninsured bike that they had already proven they would cancel the registration of. They garnished my wages to register my bike so they could immediately cancel the registration. Fucking fascist fucks if there ever were. This is the truth and nothing but the truth. Moving from the fascist fuck hotbed soon.