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Why The Fiscal Cliff Is Set To Crush The Middle Class With 50% Tax Rates

December 9th, 2012

Keith Fitz-Gerald: If I didn’t know any better, I’d think there’s a small but growing group of people in Washington who think it would actually be good if we temporarily went over the fiscal cliff.

I say that because I am seeing a smattering of articles recently suggesting that somehow going over the cliff “won’t be all that bad” or that we’re “really just talking about cuts that need to happen in the first place.”

President Obama seems to think the same way judging by the fact that he’s dug in his heels, telling the GOP there will be no fiscal cliff bargain that doesn’t include tax hikes.

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Now noted budget hawk Republican Senator Tom Coburn has broken ranks, noting that he’d rather see rates rise because that “will give us a greater chance to reform the tax code and broaden the base in the future.”

I find that to be an absolutely appalling argument given how much further the president’s proposals will squeeze the middle class.

[Related: Why The Official 2012 Unemployment Rate Is Wrong]

As Fox Business Network’s Gerri Willis, an expert on consumer and personal finance issues, recently pointed out to me, the average middle class tax rate is already 43.12%, according to the non-partisan Tax Foundation.

Beyond that, Willis says if we do go over the cliff, the average middle class tax burden jumps to nearly 50%.

I asked her how she came to that conclusion. I could only smile as she simply noted she’d “done the math,” knowing full well that’s one of the president’s tax hike tag lines.

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.

[Related: America’s $16 Trillion Federal Debt Has Escalated Into A “Death Spiral”]

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.

[Related: 4 Ways To Survive The Coming Stock Market Crash]

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.

[Related: Why The U.S. Tax System Is Broken]

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.

Written By Keith Fitz-Gerald From Money Morning

Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press,  as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the  world’s leading experts on global investing, particularly when it comes  to Asia’s emergence as a global  powerhouse. Fitz-Gerald’s specialized  investment research services, The Money Map Report and the New China Trader, lead the way in financial analysis and investing recommendations for the new economy. Fitz-Gerald is a former professional trade advisor and licensed CTA who advised institutions and qualified individuals on global futures trading and hedging. He is a Fellow of the Kenos Circle, a think tank based in Vienna, Austria, dedicated to the identification of economic and financial trends using the science of complexity. He’s also a regular guest on Fox Business. Fitz-Gerald  splits his time  between the United States and Japan with his wife and two children and regularly travels the world in search of investment opportunities others don’t yet see or understand.


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  1. Rusty
    December 11th, 2012 at 09:26 | #1

    Is there an article in here buried among the many huge popup ads?

  2. mace
    December 10th, 2012 at 21:12 | #2

    These truly are depressing times for the ever-shrinking middle-class. Many working Americans are indeed paying about 50% of there income to various Federal, State, City, County and township taxes.

    Federal income tax, Social security tax, medicare tax, property tax, water tax, tax, tax, tax, tax, and more tax.

    And for a final insult the very people “civil-servants” that our taxes go to pay use this money to torment and fine us at every turn.

    We work and pay for their and their families health care and pensions while we must work witout these safeguards.

  3. Karen in pa
    December 10th, 2012 at 20:25 | #3

    Lets start with congress & senate salary and benefits, they haven’t balanced a budget in 3 years, seems to me they can’t do their job, why should they get a salary? We are paying for them so they can be bought out by lobbyists.

  4. Karen in pa
    December 10th, 2012 at 20:22 | #4

    I say go off the cliff, I am sick of paying for BS and it should all come to an end!

  5. jd
    December 10th, 2012 at 18:59 | #5

    No one pays the tax rate unless they have NO deductions. You always have at least one.

  6. matt
    December 10th, 2012 at 17:37 | #6

    Im all for going off the cliff. Its going to hurt mightily, but to hell with it anymore. Lets just kill it off now rather than killing it slowly via leeches. Let the infection take it over and lets sstart over with the parasites dead from malnourshment. Im sick of the whining, Im sick of all the complaints. Lets just kill it now.

  7. Anne Howe
    December 10th, 2012 at 17:04 | #7

    Since 2008 the Gov has spent about $2.13 for every tax dollar collected. They say debt doesn’t matter and there should be NO LIMIT. I say, OK, if debt doesn’t matter there is no reason to collect ANY TAXES – just print up what you need to spend!

    The great part is, everyone stops taking their phony money with interest and the Elite Globalist Parasites are Done!

  8. Syrin
    December 10th, 2012 at 17:03 | #8

    AWESOME !! This is what THEY VOTED FOR !!!

    You want four more years of misery and suffering? WELL PAY UP !!! YOU DESERVE IT !!!!!!!!!!!!!!!!!!!!!!!!!!!

  9. Dennis in VA
    December 10th, 2012 at 15:35 | #9

    You do you think pays the corporate income tax? You do!

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