How Much Will It Cost You If Bush Tax Cuts End? A Lot

According to the article, Americans would have to dish out as much as $5,700 more a year if the Bush tax cuts are allowed to expire at the end of the year. According to one expert, it is the biggest tax increase to hit citizens sine World War II.

By: Jeff Cox
Published: Wednesday, 15 Aug 2012
CNBC

Americans would shell out as much as $5,700 more a year if the Bush tax cuts are allowed to expire at the end of 2012, according to a new analysis that highlights the perils and political consequences of the nation's fiscal cliff.

Connecticut residents would get rocked the worst, with an additional cost of $5,783 a year while New Yorkers would get hit $5,542 on average, the study from the nonpartisan Tax Foundation states.

Mississippi residents get the least impact, at $1,310 on average, but 29 of the 50 states will see taxpayers get hit at least $2,000.

"It's pretty dramatic...This is the biggest tax increase that would happen since World War II," said Will McBride, chief economist at the Washington, D.C.-based Tax Foundation. "I can't think of anyone who's really seriously thinking we should go through this. It would almost certainly result in another recession."

The foundation considers itself nonpartisan and awards its Distinguished Service awards each year to those who best advocate responsible tax policies. Among its previous winners are Republican vice presidential nominee Paul Ryan and conservative donor and activist Charles Koch, as well as Democrats such as former Sen. John Breaux and current Sen. Max Baucus of Montana.

The fiscal cliff is a term that refers to a series of tax increases and spending cuts that would take place unless Congress reaches deficit-reduction goals.

There are several components to the cliff — payroll tax cuts, a fix on the Alternative Minimum Tax and unemployment benefits among them — but the tax cuts enacted during President George W. Bush's term represent, at $180 billion, the biggest slice of the pie.

Economists estimate that if Congress does not reach agreement on the items it will siphon between $400 billion and $720 billion from growth, representing as much as 4.6 percent of total gross domestic product.

With GDP growth below 2 percent in the U.S. and the stock market gaining but susceptible to shocks, the stakes are high for the cuts.

"We are teetering on zero growth," McBride said. "This sort of domestic policy would immediately impact demand and really shock investors. I would expect the stock market to take a real hit in September if something like this is not passed."

Congress has been debating how to proceed with the cliff items but remains torn over the Democrats' desire to enact higher taxes on the wealthy and the Republican resistance to higher taxes of any kind.

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New Jersey residents would take the third-highest hit at $5,030, with Massachusetts ($4,277) fourth and California ($4,242) fifth. On the other side, states least hit, besides Mississippi, are New Mexico ($1,465) 49th, Alabama ($1,496) 48th, Tennessee ($1,522) 47th, and West Virginia ($1,530) 46th.

Interestingly, the most-hit states are generally considered Democratic strongholds, while the least-hit are mostly Republican.

Policy makers — Federal Reserve Chairman Ben Bernanke most prominent among them — fear the cliff in that it would impose indiscriminate cuts across the board.

But the left-leaning Brookings Institute recently asserted that the most prudent move would be to embrace the imposed cuts and tax increases as the best chance for real budget compromise.

"It would be the opposite of 'kicking the can down the road,' which is what Congress has done in the past and has been roundly criticized by experts and others," William G. Gale, co-director at the Urban-Brookings Tax Policy Center, wrote in an analysis. "It is the only way to get a deficit reduction package that is fairly balanced between spending cuts and revenue increases."

Wall Street economists, though, believe the near-term risks are too great not to provide at least short-term relief for the issues at play. Most predict a compromise that gets the U.S. through the end of 2012 and into 2013 when a new Congress, and possibly a new president, take over.

"Much depends on the election, and how strong the various factions emerge afterward," Clayton M. Albright III, director of asset allocation at Wilmington Trust Investment Advisors in Wilmington, Del., told clients. "Given the breadth of the Bush tax cuts and their large impact on people with incomes below $250,000, we expect Congress to extend them for three to six months into 2013."

If the Bush cuts expire, top tax rates will increase from 35 percent to 39.6 percent. The capital gains rate will jump from 15 percent to 20 percent while dividends also would revert to a higher rate.

JPMorgan economists predict a 15 percent chance of "falling off the fiscal cliff," and anticipate that "would essentially guarantee a recession."

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