While policymakers and the media have been focused on the looming tax increases in the so-called fiscal cliff, Americans will also face an avalanche of tax increases unless a comprehensive deal is achieved.
A fresh ACI study of fiscal cliff effects via capital gain and dividend income tax rate increases revealed the likely loss of 2 million jobs. These jobs would be lost primarily from decreases in new capital investments. Unfortunately, ill-timed employment losses seem to attend all the “revenue raising” schemes being discussed in Washington. Other revenue-raising tax proposals under discussion include elimination of the home mortgage interest and charitable contribution itemized deductions and for discontinuing accelerated depreciation claimed by small businesses. When exclusions and deductions are cut, individuals and small businesses face higher levels of taxable income, thus higher taxes to be paid and lower net income in their pockets.
The IRS’ 2010 “tax stats” database shows 46.6 million federal individual income tax returns were filed, totaling $5.6 trillion in income. Just 8% of that was capital gains ($332 billion) and ordinary dividends ($154 billion). During 2010 $1.2 trillion in itemized deductions were claimed. Thirty-one million taxable returns claimed $331 billion in home mortgage interest deductions. Others paid mortgage interest, but didn’t claim it as a deduction, probably claiming the “standard deduction” instead. Also in the 2010 tax year, 32 million taxable returns claimed $152 billion in charitable contributions. Many others will have skipped filing a Schedule A to claim their contributions as a deduction.
The vicious alternative minimum tax (AMT) was muzzled during 2010. It nevertheless ripped $27 billion away from four million filers. Of that four million, 1.6 million were tax filers with adjusted gross incomes between $100,000 and $250,000. If Congress allows the AMT to revert to its natural predatory state, it will savage many more taxpayers, even at much lower incomes.
The IRS’ 2009 tax stats shows a million firms claimed $610 billion in depreciation. But just $8 billion of that was in Section 179 accelerated depreciation, a category for almost immediate write-off available only for small businesses in 2009. The $8 billion is significant as a beacon of a poor economy rather than an opportunity to squeeze more tax revenue from an ailing sector.
Capital gains and dividends income totaled $486 billion in 2010, and mortgage interest and charitable contribution deductions totaled $483 billion, very similar levels. But they are subject to different tax rate changes. The fiscal cliff jump in capital gains and dividend taxes is a blended 12.7% increase. In contrast, today’s middle-of-the-road 25% tax bracket will go to 28%, a 3 point hike, or about one quarter of the 12.7% impact on dividend and capital gains rates.
Mortgage interest deductibility is very important to home-buyers and to employment in today’s moribund housing sector. Using the latest government data, if just 20% of home purchasers decided that interest deductibility was a necessary condition for affordability, the resulting drop in the home purchases would cost the real estate, construction and other related industries nearly one million jobs. Clearly, removing these tax deductions will mean fewer workers to tax.
Concerns surrounding an increase in individual tax rates are real, and should not be understated. However, our representatives must not lose sight of these other critical tax issues that, if allowed to expire, could unleash havoc on an already weak U.S. economy.
Alan Daley is a retired businessman living in Florida and following public policy issues from a consumer’s perspective.