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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Tue, 01/01/2013 - 13:25 | 3112269 stateside
stateside's picture

Woke up in my old Kentucky home this morning to see that Rand Paul voted against the cliff deal.  At least there is some hope left in this country.

stateside 

Tue, 01/01/2013 - 13:26 | 3112270 Calmyourself
Calmyourself's picture

The market will stop the spend, sure they will..  Get it straight no one will stop this no institution no government no one will stop this path we are on this is the ride to our serfdom.  Only the people can put a stop to this and they are corrupted, enjoy the ride.

Tue, 01/01/2013 - 13:38 | 3112296 Catullus
Catullus's picture

The country is being run by a group of preteens hocking a popularity contest while they spew high school civics lessons at us. This is beyond idiotic. They're running a $1.5tr cash deficit annually and they just cut the increase in their baseline spending by $15bn. They're barely covering 8 hours of DEFICIT spending. It's already noon on the East Coast, there goes the spending cuts.

Tue, 01/01/2013 - 13:38 | 3112297 yogibear
yogibear's picture

Deficit just keeps on going skywards until all confidence in the US dollar is gone and the US dollar crashes.

Nothing changes the trajectory and plan.

Tue, 01/01/2013 - 13:49 | 3112310 Joebloinvestor
Joebloinvestor's picture

If you don't think this administration isn't into "re-distribution", they just put the fucking kibosh on anyone making $400k marrying anyone who makes $400k and filing jointly.

They want the $400k earners to marry the un-employed.

I bet there is some hidden tax language that is gonna prevent married who filed jointly before from filing seperate.

 

Tue, 01/01/2013 - 14:49 | 3112452 Catullus
Catullus's picture

Or the productive spouse of the $350k income earner just stays home.

Tue, 01/01/2013 - 14:54 | 3112466 Bangin7GramRocks
Bangin7GramRocks's picture

Bee oh oh, eech oh oh! Me and my high earning spouse must pay 5% more taxes. Waaaaaaaaah! We may have to have an non-butler suite on our 2 week cruise next year.

Tue, 01/01/2013 - 15:22 | 3112514 Winston of Oceania
Winston of Oceania's picture

I hope YOUR boss lets you go to pay for the free shit army...

Tue, 01/01/2013 - 13:47 | 3112320 Everybodys All ...
Everybodys All American's picture

Anyone remember exactly when Congress and the administration started talking budget numbers in ten year terminology? What the hell ten years. While we are dreaming why don't we pass the budget for 100 years.

We need to first demand that these m'fers pass a budget. I'm starting a "Budget now or get the fuck out" campaign. Hey, if CNN can simulate bj's on live tv why can't I use this motto?

Tue, 01/01/2013 - 14:17 | 3112381 gnomon
gnomon's picture

The "broken window" recovery will likely start at the White House and Capitol Hill after our reserve currency status is revoked.  Then I guess it is off to the Denver Airport for whoever has been granted warlord status.  

Hope and Change!  (Shove it where the Sun don't shine!).

Tue, 01/01/2013 - 14:32 | 3112414 redd_green
redd_green's picture

Tax hike on the 1% Dude,  it won't even go back to what Bush cut from their taxes 11 years ago, and most of the very wealthy stuck a ton of money offshore over the past decade.    Please...

Tue, 01/01/2013 - 15:09 | 3112488 Winston of Oceania
Winston of Oceania's picture

"Tax hike on the 1% Dude"

 

Yea, eight more days of Gub'ment largess... Our way of life is coming to an end and you want eight more days of free shit. Because of humps like you we are ALL in for it, just wait a few months and see.

Tue, 01/01/2013 - 15:11 | 3112491 forrestdweller
forrestdweller's picture

i don't  understand americans. not willing to pay taxes, but expecting a lot from your government. security, good roads, public education, waste disposal, etc. these things have to be paid for. that is why you pay taxes. not to let your country disintegrate.

Tue, 01/01/2013 - 15:15 | 3112502 Winston of Oceania
Winston of Oceania's picture

We don't want those things from Gub'ment as they are simply the worst at delivering them in both quality and quantity.

Tue, 01/01/2013 - 19:22 | 3113104 smiler03
smiler03's picture

"i don't  understand americans. not willing to pay taxes"

 

Very good point. These ZH readers not advocating paying taxes are also the first to criticise the Greeks for NOT paying taxes. They want it both ways. American citizenism hypocritical fuckisms.

Tue, 01/01/2013 - 19:28 | 3113123 akak
akak's picture

Go smile for the surveillance cameras, Brit.

But not too wide --- wouldn't want to highlight your bad teeth.

Tue, 01/01/2013 - 15:37 | 3112568 midtowng
midtowng's picture

There is a class war going on - it's the one against the working class. And the rich are winning it.

And yes, $400K a year is rich. I bet the guy writing this doesn't get that much.

Tue, 01/01/2013 - 17:29 | 3112824 Monedas
Monedas's picture

Break up nepotism of our bureaucratic dynasty families .... no family .... defined, let say, as any parent and their children (natural, adopted and step) .... may have more than 15% of their members on any government payroll !  Clean up the fossil families of federalism ! Only one head of a nuclear family .... can hold a government job !  No double, triple dipping ! No cash out retirements ! The fat cats are the bureau CATS !  We have to completely rethink wealth, privilege and security .... as it really is !  No more paradigms of our innocent past .... government employees are our new privileged class !

Tue, 01/01/2013 - 19:15 | 3113092 smiler03
smiler03's picture

"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."


A 117 word sentence! I nearly died from hypoxia just reading it. This Tyler needs to learn how to write in decent comprehensible English. 

"Words per Sentence: This also should be kept to a low number. Experts (whatever that means in the field of creative writing) have varying ranges, but they tend to center around a range of 17-20 words per sentence. This is an average number that you treat as such. Even if your ideal number is in an acceptable range, your manuscript could contain extremely long sentences mixed with extremely short sentences, or be more monotonous with all sentences of the same length."

http://www.mywritertools.com/lightenup.asp

Tue, 01/01/2013 - 19:52 | 3113167 smiler03
smiler03's picture

Change the bloody stupid Tax code!

 

Set a flat tax rate of 19% on everything. A great lesson for the US (and the UK). Save paper on the 10 billion page tax dodging manual. Sack 1 million tax officials and do a Slovakia. Isn't this what the US model used to be?

 

http://www.businessweek.com/magazine/content/11_16/b4224B15653363.htm

Tue, 01/01/2013 - 22:23 | 3113612 Matt
Matt's picture

19 percent tax when you earn the money, and 20 percent when you spend it. Brilliant. That's a total of 35.2% tax federally.

The general idea is good, but holy hell the rate is pretty aggressive. 

Edit: closer to 32.5% effective once combined. $100 -19% = $81. You get $67.50 worth of goods/services plus 20% tax = the $81.

Wed, 01/02/2013 - 01:01 | 3114026 resurger
resurger's picture

Forwaaaaaaaaaaaaaaaaaaaard

Do NOT follow this link or you will be banned from the site!