Forget the Mayan calendar and the end-of-the-world scenario that some people think it forecasts for this coming December. A real potential economic doomsday often referred to as “Taxmageddon” could take place at the end of the year unless Congress acts in time, affecting millions of individual and small business taxpayers across the U.S.
Taxmageddon is a term that was originally coined by Congressional aides to describe a set of important federal spending and tax policy changes that are scheduled to go into effect nearly simultaneously, on or near January 1, 2013. Some economists think that these changes occurring together would drag down the U.S. economy enough to plunge the country into another recession.
Among the tax and budget laws that will either automatically go into effect or come back to life as temporary legislation automatically expires are:
- The so-called Bush tax cuts (lower tax rates that were put in place for a 10-year period beginning in the second Bush administration) will expire, causing income tax rates on earnings, investments, estates and gifts to return to higher 2001 levels
- The employee share of the Social Security payroll tax will revert back to 6.2 percent after having been temporarily lowered to 4.2 percent for the last two years
- The so-called marriage penalty for two-earner families that file joint tax returns will return for couples in certain income brackets
- The child tax credit will be reduced from $1,000 per child to $500 per child
- New Medicare taxes will be levied on high-income households as part of the Obama administration’s health-care plan
- Significant budget cuts, known as “sequestration,” will take place for many federal programs and agencies, unless Congress agrees on a plan to slash $1.2 trillion from the federal deficit first
- Unemployment benefits will expire for some Americans
The non-partisan Tax Policy Center has calculated that Taxmageddon would result in the federal government tax collections rising by about $400 billion in 2013, with taxpayers earning salaries in the middle 80 percent of the income range expected to pay an average of $3,700 more. The Heritage Foundation estimates that federal tax collections will rise by closer to $500 billion.
Analysis from Moody’s Analytics indicates that the effect of these changes, combined with the end of federal stimulus spending under the Obama administration’s Recovery Act, would offset any economic growth in 2013 by an amount equal to 2.8 percent of the nation’s gross domestic product. That could mean net negative economic growth, which spells recession.
As it draws nearer, Taxmageddon has become the subject of increased attention from both the mainstream and partisan media. Presumably such media coverage should result in mounting public pressure on Congress to avert the crisis, although it’s not clear how effective such pressure from the electorate would even be in getting the House and Senate to act at this time, what with so many members of Congress now focused on campaigning for re-election in November.
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