Just before the Christmas break, negotiations on the so-called fiscal cliff ended on an absurdist note. House Republicans not only rejected President Obama's overly generous budget deal, including his offer to lift the income threshold for higher tax rates to $400,000 a year from $250,000, they also rejected their own leadership's proposal to raise the threshold for higher taxes to $1 million and to preserve tax breaks for the heirs of multimillion-dollar estates.
Most of the fiscal-cliff discussion has focused on higher income tax rates from the expiration of the Bush-era tax cuts and automatic across-the-board spending cuts. But failure to reach a deal by year-end would also bring about deeper and more immediate pain for low- and middle-income Americans.
No deal means the end of federal unemployment benefits, averaging $290 a week. Some two million people would be cut off immediately, and nearly one million more who would be cut off in the first quarter of 2013. It means the end of the 2 percent payroll tax cut, which, for the past two years, has reduced taxes for 125 million households, boosting pay by nearly $1,000 a year for the typical household making $50,000.
It also means the end of improvements in tax credits for low-income working families, as well as a credit for low- and middle-income families with college costs, enacted in 2009. If the credits are pared, some 25 million Americans would lose an average of about $1,000 a year in benefits in 2013, and roughly eight million children would either fall into poverty or sink deeper into poverty. The child tax credit for a single mother working full time at the minimum wage, for instance, would be cut from $1,725 to $165. That would be a huge and shameful step backward.
Failure to resolve the fiscal cliff would also force 28 million Americans, most of them making between $100,000 and $500,000 a year, to pay the alternative minimum tax when they file their 2012 tax returns next year. Their situation is obviously not comparable to that of the working poor, but it is also unfair. The alternative tax was supposed to apply to multimillionaires whose tax breaks reduce their tax liability below a level that is considered a minimum fair share. But, for more than a decade, it has not operated that way. Rather, superrich Americans have largely escaped the alternative tax, while those further down the income scale are ensnared — unless Congress votes to exempt them from the tax that they were never intended to pay.
With only five days left to make any progress this year, President Obama has sensibly called on Congress to pass a scaled-back plan that would extend the Bush-era tax cuts on incomes below $250,000, suspend the automatic spending cuts and extend federal jobless benefits. He has also called for a quick fix to the alternative minimum tax, so that the tax filing season can proceed without the administrative nightmare of retroactive adjustment.
All that would help to stabilize household budgets — and the economy, which has shown signs of slowing recently, and which, in the absence of a deal, has no hope of faster growth in early 2013.
Passage of Mr. Obama's scaled-back plan would also buy time to reach a bigger deal later — one that provides additional government spending to replace the stimulus that will be lost when the payroll tax cut expires and makes the low-income tax credits permanent, coupled with a higher debt limit and with deficit reduction that takes place as the economy recovers.
But if Congress cannot approve a deal by New Year's Day, the anticipated sell-off on Wall Street in early January would, one hopes, force House Republicans to budge.
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