Expiring Tax Relief Would Hammer Middle Class

We can manage sequester, but tax hikes will cripple the middle class and small businesses

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By Pete Sepp

, Executive Vice President of the National Taxpayers Union

November 16, 2012

About Pete Sepp:

Pete Sepp is executive vice president of the National Taxpayers Union.

The situation known as the "fiscal cliff" is made up of multiple precipices, some much steeper and more worrisome than others.

One part—the so-called "sequester" that would reduce domestic and defense expenditures by $109 billion next year—is more like a downhill slide we can (and should) manage. After all, the federal government is spending over $3.5 trillion in the current fiscal year, roughly $500 billion more than in 2008. The National Taxpayers Union spearheaded a coalition letter signed by a "who's who" of 22 fiscally conservative organizations urging Congress to respect the sequester. If Congress changes the mix of program cuts, so be it. However, backing away from the $109 billion goal would cause more harm to Congress's already sagging credibility—and over the long run, our nation's credit—than moving forward now.

[See a collection of political cartoons on the fiscal cliff.]

Most significantly: expiring tax relief, the end of protections against the Alternative Minimum Tax, and new taxes associated with the federal healthcare law amount to a yawning chasm five times as deep as the spending sequester.

Tax rates for all brackets would go up, hammering the middle class and small businesses. The expanded Earned Income Tax Credit and other provisions that Democrats tend to favor would spread the damage far beyond any single party's constituency. Furthermore, a sensitive financial system would be crunched by capital gains and dividend tax hikes.

Purely administrative headaches to businesses and individuals will cause serious pain too. Thanks to dithering on both ends of Pennsylvania Avenue it's possible that the 2013 income tax filing season will be delayed or disrupted even if an agreement on extending the tax laws is reached soon.

[See a collection of political cartoons on the budget and deficit.]

Temporary policies like these are another reason why the tax code should be scrapped in favor of a new system; but it should be done deliberatively, not by default.

If the nation is able to keep moving after such failures of leadership, there is yet another fiscal cliff awaiting.

Entitlement spending was deliberately dodged when the debt-ceiling deal that is triggering the sequester cuts was passed. Regardless of what happens on the tax hike front, Washington's promises surrounding social welfare programs are unsustainable. Congress and the president must address this challenge and build a path over this giant canyon. Otherwise the United States will experience a fall it cannot limp away from—and the nation's taxpayers as well as our neediest citizens will hit the ground first.