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.

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blunderdog's picture

    Tell me again why anyone actually works anymore?

'Cause virtually nobody's rich enough not to.

HurricaneSeason's picture

They work for the beneifts, like Obamacare. (true story)

malek's picture

Try to get your facts straight: Over $400k you will pay 23.8% on capital gains and dividends.

As 3.8% Medicare tax gets added to all unearned income by Obamacare no matter what tax bracket you're in.

Pool Shark's picture



Not to throw a wooden show into the works, but...

All revenue (tax) bills must originate in the House of Representatives.

Oh, silly me! I should have remembered that the Constitution no longer applies...


rwe2late's picture

 The Senate regularly legally satisfies (sidesteps) that provision by rewriting (amending) a previously passed House appropriations bill.

Presumably, that is what they have done this time.

Regrettably, there are far more worse, and clearly much less defensible violations of the Constitution and Bill of Rights

to be "outraged" about.

lizzy36's picture

The US still spends a Trillion dollars EVERY YEAR MORE than it takes in, in revenue.

Explain to me like i am a 6 year old how this changes anything.

Mayans had any sense they would have taken out Washington!

adr's picture

Actually it is almost $3 trillion in tax cuts over ten years. The Bush Tax cuts expired at Midnight.

With all the cuts and tax increases that went into effect on Jan 1, right now on paper the Federal Government is running a budget surplus.

Yes it is all bullshit but what coming out of Washington isn't?

Remember Clinton balanced the budget by changing the definition on how the government counted.

Winston Churchill's picture

And the CBO etimates,horrific as they were,included to reversion to the Clinton

tax rates.

The bond market is going to take a shit ,when this is scored.

keesooi's picture

This changes nothing, nada, zilch.

As long as government keeps spending, we keep being taxed.  The $1T+ deficit is entirely financed through the 7-8% inflation we are currently enjoying.  This theater may change the makeup of who pays in a very minor way, but that's about it.  This "sticking it to the rich" crap ignores the fact that the inflation burden is being carried dispproportionally by those who have to consume most of their income (i.e. working people, SNAP card holder, SS recipients, etc.).  And never mind that the payroll tax increase also disproportionally affects those making at or below the $113k treshold (Again, the odinary working folks).  For the rest of us, the message is hopefully clear:  consume less (in FRN), and save in PM. 

Let's face it:  .gov is not interested one bit in reducing its size and scope, and through its MSM mouthpieces it is very effective in selling that to the masses. And as long as there is a Federal Reserve, we will have deficits, endless war, inflation and a very healthy/wealthy .1%.  Plan accordingly.

Wake me up if .gov actually cuts anything.  And no, "cuts" in the increase of a baseline 8% budget does not count as a cut in my book.  The tragedy is, that it would be quite easy to cut $1T out of the budget without hurting one poor person or SS recipient. It would hurt the MIC, big pharma, argri, energy, finance and all the other leeches.  Which is why it will never happen, of course.

Whoa Dammit's picture

All of this political nonsense reminds me of Dr. Strangelove's next to last lines:

"Sir! I have a plan!"


Monedas's picture

The $450K threshold was a given .... to cover most public sector employees .... you got rolled again, Boehner .... and by the Nigger In Charge ?        Monedas      1929       Comedy Jihad World Tour

Monedas's picture

Send $25 to Monedas Inc. for a list of IRS Audit Centers with Google maps and fire ratings !

Everybodys All American's picture

Personally now that we are over the cliff I don't see why the House would not say no to all of this. What is law is already law and has been agreed upon 18 months ago. Those spending cuts in sequestration are needed to bring balance to an out of control government.

Start with a new slate. If you want to pass middle class tax cuts, now is the time to bring it up. If you want to extend unemployment to 2 million people and whatever else bring it to the floor in a new bill. What is done in the last Congress should stay in place.

HurricaneSeason's picture

Because they want to spend $400 billion on F35 jets as soon as possible plus $400 billion on 100 bases to surround China with plus maybe $1 trillion towards some more aircraft carriers and a missle shield around Europe(Read Russia). Then they'll get $5 million each in campaign contributions and $100,000 an hour speech fees when they retire. The defense "cuts" (Read cuts to anticipated increases) got kicked for 2 months. #winning #tiger blood

gnomon's picture

When you as a nation are bankrupt ten times over you will do anything to preserve the status quo-lie, cheat, corrupt the mechanism and underpinnings of your own government, (doing permanent damage), and lastly, kill without due process in contravention of your own Constitution, (if that is what it takes). 

These are the fruits now ripening, nay rotting, on our national tree, courtesy of decades of moral decay and a financial idiocy that was clearly doomed to failure the moment it was embarked upon. 

It is over.  These are the fibrillations of a dead corpse.  And the rest of the world is running with us, neck and neck.

2013 may very well be the most interesting of years.

I am Jobe's picture

Forward, more Hope and Change- bend Over Inbred Fucks of Amerika.


Read more at http://investmentwatchblog.com/french-government-cuts-immigrants-welfare...  

overmedicatedundersexed's picture

the secret;frn's are the fed's .gov defaults and prints us bank note. big banks go bk with fed. perhaps the .gov folks know that it's the fed left holding the bag-they can spend frn's as long as ben lets them..for smart people they are dumb as rocks

Monedas's picture

"I voted Democrat .... because the Republicans are almost as bad .... and I wanted a pure play !" .... ????

forrestdweller's picture

this is what americans need. less spending, paying a bit more taxes.

you will get the money back.


Bastiat009's picture

Stealing is stealing. Stealing a rich is not more moraly acceptable than stealing an almost rich or a not quite rich. Or maybe, raping a fat girl is more acceptable than raping a hottie.

Disc: I am not rich or a hottie.

yogibear's picture

What happened to Simpson-Bowles an it's spending cuts?

Where are the rating agencies? The US needs to downgraded.

Fitch? - sleeping

Moody's - sleeping

S&P? - sleeping

Jena's picture

Ratings agencies paid off or threatened into silence.

Grand Supercycle's picture

Wile E Coyote awaits...

As mentioned, whether it’s caused by fiscal cliff, debt ceiling, Europe or something else, it doesn’t really matter because as noted before – another crash is guaranteed.

It’s a no brainer.
Charts don’t lie.


lakecity55's picture

So, by my logic, that makes Ron Paul the Roadrunner.

He is the only one who is telling us this is Kabuki and is going to implode.

HurricaneSeason's picture

Gerald Celente tells us it is Kabuki too, but Gerald Celente lost $1 million when MF Global stole investor funds where Paul raked in $175,000 a year plus leftover campaign funds and side deals for decades from the evil government.

SmoothCoolSmoke's picture

I'm rooting for you....but I think you are dreaming. TPTB have foisted on the people that idea that the markets are the economy (why do you think all the politicians time their remarks to the needs of the Dow?).....and they have figured out how to controll the markets.


MFLTucson's picture

So those bad Republicans couldn’t hold the line says the Obama Media. Not the case though, they had two choices, to let the country collapse now and hold the line or work with Americas elected clown show. So they did the best they could to avoid the immediate collapse and a tax on 100% of the people and the plan is tailored to fit what the American Clown wants and the Republicans are at fault. You have got to be fuckin joking me, where does this end and when does someone stand up and call it for what it is? Must say, I was so impressed with CNN to watch that haggard old bitch climb into the crotch of the queer. Just what America stands for and just what the children of this disgraced nation should be watching.  Got to love what the liberals have done with their influence in Hollywood and in the media, what a pile of crap!

RSDallas's picture

I just hung up with a nice lady from my congressman's office who got an earful (respectfully) from me on this hokus pokus bullshit.  everybody needs to call your representative NOW!

GAAPpreNixon's picture

Dear Tyler,

A "reduction in consumption" from the ridiculously small tax hike on the 1%? From "consuming" WHAT?

STOCKS? It is an established fact that the 1% are SKINFLINT low consumers! They have a disproportionately low effect on GDP for their group! Raising SNAP coupons does more for GDP than letting the 1% continue imitating SCROOGE!

AND THE 6.2% Social Security tax is GOOD NEWS, not bad news because it keeps the SS SOLVENT SO LYING ASSHOLES FOR THE 1% LEACH CORPORATE WELFARE QUEENS cannot claim it is insolvent!

I expected less PR and more candor from Zero Hedge. But you were right about one thing: All the "fiscal cliff" talk was and is BULLSHIT.

Libertarian talking points ALWAYS fail to point out that 90%  of the research on technical and medical discoveries that corporations use to make huge profits are funded by WE-THE-PEOPLE before the patent gets handed off to corporate welfare queens for a song/blow job/political bribe. You've been drinking too much of that Ron Paul koolaid/bullshit.

GAAPpreNixon's picture

My my, did we hit a Randian nerve, per chance? Here's more food for Galtian fantasy loving delusionaries: This homesteader makes the case that we don't have what it takes, neither the skills nor the mindset, to retrain ourselves to the enormous responsibility of an agrarian life, of true self sufficiency. We delude ourselves, like the Libertarians, when we cling to the childish fantasy that humans aren't social beings that require division of labor and a hierarchy of interdependent socialist structures in order to have a decent and just society. http://www.youtube.com/watch?v...

akak's picture

And a very Happy Institutionalized Coercion New Year to you too, LetThemEatRand!


(For what it's worth, I liked your old handle better.)

MFLTucson's picture

They dont care what you have to say, they just want your vote and will lie to you everytime.

H E D G E H O G's picture


MsCreant's picture

They don't care about your bold black cap letters, your insults, your email or your rage. You can't do something for them or get them material rewards. You don't matter. I don't matter either. Carry on with your life and get ready for it to fall apart. May not happen in our lifetime but if you have kids your preparations will help them. Nothing like a little insurance that you can see, food, water filtration, means of alternate power... They will do what they are doing until they can't. Not enough of us in the US understand how corrupt the system is to matter. The idea that there was justice has always been an illusion. We were born into it and sold bullshit. 

Fuck all your efforts towards them. Get ready to take care of yourself. They don't matter. This thing is broken.

tango's picture

Your first priority should be an anger management course.  Having this much pent-up fury 24/7 is not healthy - emotionally, mentally or physically.  You can disagree with decisions (I wrote my Senators this AM), present your points and discuss but truly, you need to calm down.

Fix It Again Timmy's picture

DELUSION - "the expectation that 535 clueless twits have the capability, intelligence, and drive to solve ANY problem, much less a pressing one."  They can barely manage their lobbyists' appointments...

LawsofPhysics's picture

What garbarge. The underlying destruction of trust, the rule of law, and the currency itself is the real issue. Let the chaos of a complex system out of balance begin, that which cannot be sustained, won't be. NOTHING changes until the supply lines break. Hedge accordingly.

MsCreant's picture

"NOTHING changes until the supply lines break."

THIS! Nothing else is going to do it.

Jena's picture

Some people don't understand or notice until their lives are disrupted. No one likes having to give anything up.

JR's picture

The magic of modern finance is in the spin, in the manipulation of news dissemination. The oligarchs’ trick is to combine their totalitarian rule over the currency with the subjugation of the mind, now not only controlling Congress but all social and political life in America.   In order to corrupt and plunder with impunity, they not only have taken possession of America's public education system but possession of the nation’s most powerful newspapers and broadcast and non-broadcast media, from Hollywood to the universities.

The owners of the Fed print their paper notes at will to buy up the world's press and infiltrate academia, using the propaganda and misinformation garnered on behalf of their ideas as they grab more and more political and social power.

Going into 2013, it’s nothing less than a mercy to have Tyler Durden at the helm of Zero Hedge, on watch to deal in as much damage control and rebuttal as possible. Daily, the credibility of this government sinks lower.

Everybodys All American's picture

$15 billion in spending cuts in total and they are talking about a $60 billion dollar spending bill for Hurricane Sandy alone which you know will pass. Farce doesn't begin to describe this deal.

HurricaneSeason's picture

Yeah, Grover Norquist recently said something like they'll pass continuing resolutions funding the government 2 months at a time. The fools will be on tv 24/7 and the markets and dollar will reflect it. We're about to find out how many people work for the government, whether they work at a private sector company like the post office or not.

Elmer Fudd's picture

Our politicians/govt/system cannot stop the spend, the market has to.  That would be like asking an addict to slow down, when he still HAS CREDIT ACCEPTED AS REAL MONEY.  Which is a really sobering thought of whats gonna happen when the dude really gets cut off.  That addict has a big gun.

MsCreant's picture

If I know a business is going bankrupt or close to it, I have a choice not to do business with them, not to extend them credit, etc. 

No such choice with the US Government.

We are all hostages to this farce. Ponzi scams don't put a gun to your head. You go in thinking you are going to get more out than you put in. Your greed gets you. This ain't Ponzi, Ponzi implies choice. 


malek's picture

So in summary nothing changes compared to before that "compromise" except the "new rich" over $400k pay about 5% more tax on all their income. That's sure gonna fix things.

tango's picture

You have to love the way Obamacare taxes are being ignored.  Of course, the biggest tax is the meteoric rise in health premiums under the "Affordable" Health Care Act - lol.  Then there is the "investment penalty" hitting many along with new taxes, fees, fines... It's like the US financial house is on fire and Congress's solution is to throw gas.   

orangegeek's picture

Government at all levels is like a jockey whipping a horse going into the finish with no finish line.


The more the government spends, the greater the burden on the private sector to deliver the tax revenue and the greater the burden on the consumer.




SP500 weekly is showing top - it will be interesting to see what Q4 brings - growth RATES are already on a negative slope.