The 2013 Fiscal Cliff is looming large. If the Bush Tax cuts are allowed to expire in January due to Congressional gridlock experts are projecting that Democratic states who supported President Obama in the 2012 elections will be hurt the most. The tax hike caused by the US fiscal cliff will hurt many middle class families, especially in the northeast United States.
As previously reported on The Inquisitr, Federal income tax brackets are uniformly imposed on each each state despite large differences in the cost of living and thus the average income within a state. This results in states that are “richer” paying more than their fair share in taxes. In what is termed the “Gelman paradox,” rich states tend to lean Democratic while rich people generally vote Republican. The further paradox is that while poor states lean Republican, poor people generally vote Democratic.
According to MarketWatch, increasing overall taxes by $514 billion next year will make America less competitive and slow the economy. More companies will go offshore, where corporate tax rates are more competitive, and make fewer investments into growing business. People will spend less because more is going to the tax man. The Congressional Budget Office estimates that going over the fiscal cliff will reduce GDP growth in 2013 by half a percentage point, and that the unemployment rate, which currently stands at 7.9 percent, will rise to over nine percent.
According to an analysis by the Tax Foundation, families in Hurricane Sandy-ravaged New Jersey will face the highest tax increase, paying 6.82 percent more in taxes which amounts to about $6,933 a year. Poor Democrats especially will be affected by the elimination of the 10 percent tax bracket, bringing the minimum tax bracket up to 15 percent. The expiration of the Bush tax rates also includes the elimination of the Alternative Minimum Tax, the reduced deduction for married filers, and ends the two percent cut to employee-side Social Security taxes.
Top Five Tax IncreasesTax Increases as Percentage of Income
#1 – New Jersey $6,933 6.82%
#2 – Maryland $7,194 6.74%
#3 – Connecticut $6,653 6.62%
#4 – Massachusetts $6,632 6.53%
#5 – New Hampshire $5,660 5.81%
Nancy Pelosi and Obama are pushing for Republicans to agree to an increase in the highest tax bracket. In return, Republicans are asking that some portions of Obamacare be considered for the chopping block.
Unfortunately, small businesses account for 99.7 percent of employment in the US and create more than 50 percent of the non-farm private gross domestic product (GDP). I say unfortunately because 48 percent of small business income flows through to personal income taxes and thus is taxed at the current 35 percent individual rate.
If this occurs, some businesses will be forced to cut back if the Bush tax cuts expire and the top tax rates rise to 42 percent, which includes the new Medicare tax imposed by Obamacare. Small businesses may also delay expansion and investment and lay off workers.
Some Democrats even believe that going over the fiscal cliff should not be avoided since the economical woes will give them a better bargaining position over Republicans:
“If the Republicans will not agree with that [raising the highest tax bracket], we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year,” said Patty Murray, who was co-chair of last year’s deficit super-committee. “And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this.”
According to the Associated Press, Democratic group Third Way is floating a possible compromise. Their budget plan is designed to raise $1.3 trillion in new revenue over 10 years without changing the Bush income tax rates. Instead, it would cap itemized tax deductions at $35,000, which may still affect small businesses. Charitable deductions, however, would be exempt. It would reinstate the 2009 estate tax exclusion to $3.5 million, with a tax rate of 45 percent for values above that threshold. And it would raise the tax rate for capital gains and dividends by five percentage points, to 23.8 percent.
The 2013 fiscal cliff may harm Obama supporting Democratic states the most but so far Congress and the President have not been able to broker a deal. The US Federal government this October spent $304 billion dollars while collecting only $184 billion in revenue. This means that the new Congressional debt ceiling and a possible Federal shutdown is quickly approaching, shrinking the time available to fix the Federal deficit budget problems. Meanwhile, Democratic states who voted for Obama may be in for a squeeze of their own.