The Fiscal Cliff Is Set To Clobber The Middle Class With Nearly 50% Tax Rates

Unless Congress takes action, Willis observed, the average middle class federal rate jumps to 28% from 25% when the Bush-era cuts are allowed to expire. At the same time, payroll taxes will jump 15% from 13.3% to 15.3%.

Factor in state taxes, which average 4.82% nationwide, and that would take the total average middle class tax burden to 47.5%.

Keep in mind that doesn’t include state income tax hikes, city or county taxes, many of which are on the rise no matter where you live thanks to decades of poor fiscal management.

Chances are, many middle-class earners living in states like California, Oregon, New York, New Jersey and Hawaii, for instance, will actually have substantially higher tax burdens that, practically speaking, are well in excess of 50%.

The Rocky Ground at the Bottom of the Fiscal Cliff
The real world stakes behind the debate are very high.

Case in point, the President’s Council of Economic Advisors estimate that a rise in middle class taxes and the corresponding decrease in consumption would shave 1.4% off GDP, which is consistent with the signals being telegraphed from that other great oxymoron in DC, the Congressional Budget Office.

Even the president’s team has estimated that consumers will spend nearly $200 billion less as a result of higher taxes alone.

Conversely, the latest GOP deal called for $800 billion in new revenue via tax reform while not increasing tax rates on the top 2% of taxpayers. It also involves limiting tax credits and capping deductions.

Naturally it was quickly rejected by the White House because it doesn’t meet the “test of balance” according to White House communications director Dan Pfeiffer. House Minority Leader Nancy Pelosi, D-CA, was quick to jump on the bandwagon noting that the GOP’s proposal is yet “another assault on the middle class, seniors, and our future.”

Exactly -an assault on the middle class.

Willis believes “that taxes shouldn’t go up on anybody right now. Growth is sluggish and anemic so the prospect of tax hikes don’t make sense, especially on those the president purports to protect.”

I agree. What you want to do is improve growth. Do that and you have improved employment.

That, in turn, takes more people “off the dole and leads to higher receipts,” Willis added.

Half of Every Dollar Earned?
But how high should taxes go, and who’s going to pay them?

For some reason, corporate taxes are strangely missing from the entire discussion.

According to the United States Office of Management and Budget (OMB), the 2013 fiscal year budget calls for $237 billion in corporate income tax revenue against individual income tax revenue of $1.165 trillion.

If you add in Social Security and other payroll taxes, individuals are on the hook for more than $2 trillion in taxes, or 81.25% of all revenues the government intends to collect.

Very few corporations actually pay the often demonized 35% U.S. corporate tax rate. In fact, the average U.S. corporation pays just 12%. Many don’t even pay that.

Instead they use legions of lawyers and thousands of foreign subsidiaries to pay taxes only when they bring them home and repatriate their profits. Or, they stage a tax rebellion of sorts.

Willis believes that the White House doesn’t grasp the fact this is already well under way as companies like Oracle, Costco, Wal-Mart and more than 200 others rush to pay dividends early with the express purpose of avoiding tens of millions of dollars in higher taxes that presumably lie ahead in 2013.

Adding insult to injuries the struggling middle class has already sustained, what these companies are doing is “all very quiet and perfectly legal,” she observed.

If only the middle class had that option.

Let’s just hope it’s not half of every dollar earned.

Related Articles and News:

• Money Morning:
  Is America Having Enough Babies…Or is it Another Sign We’re Turning Japanese?
• Money Morning:
  Here’s What President Obama’s Win Means For Your Money
• Money Morning:
  The Fiscal Cliff’s Biggest Surprise Could Be a Rising U.S. Dollar
• Money Morning:
  QE Infinity Won’t Work, But Here’s What Will
• Money Morning:
  How to Play Q4 Defense: Hedge Your Bets, Up Your Stops and Sell Your Gold