Wednesday, November 28, 2012

Is the Fiscal Cliff Progressive?

Is the Fiscal Cliff Progressive? Some analysts say that is, but I am not so sure. 

Y Axis: Effective tax rates.
X Axis: Income. 

I am looking at only tax rates that effect take home pay, taxes on payroll and income. All effective tax rates will increase by 3 to 4 percentage points across the board at the beginning of next year. People at the lowest end of the income scale would see the largest jump in effective tax rates, by about 5 to 7 percentage points, except for the fact that they are the ones who benefit most from deductions. Not exactly progressive.

Yet there are tax credits and deductions for home ownership, children, education, and many others (or just the standard deduction) - which is not shown here - which help this group pay a much lower amount in taxes than the rates alone suggest.  If your burden would suggest a negative 10 percentage point rate including deductions - but the government does not pay out deductions less than zero - then it does not affect your wallet if the rates increase seven percentage points, you still end up paying no taxes. 

What this also does not include is:
The increase of Inheritance taxes (affects only the rich)
The increase in Capital Gains taxes (affects primarily the rich)
Cuts in Military spending and personnel (affects primarily the middle class)
Cuts in Social Services (affects primarily the working class)

It's hard to say the total effect of the fiscal cliff without more information (and making a whole lot more assumptions).

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