Nearly every household in the United States would pay higher taxes in 2013 unless Congress reaches a compromise on tax, spending, and deficit reduction measures over the next several weeks.
If a host of Bush-era tax cuts expire on Dec. 31 as scheduled, households would see an average increase of $3,500 in their tax bill, according to an analysis by the Tax Policy Center, a nonpartisan think tank in Washington. The increases would vary according to income, but 90 percent of all households would pay more.
High-income earners would be the hardest hit, with the top 1 percent facing tax increases of more than 7 percent, compared to about 4 percent for middle-income families.
“The average American household should expect that they will see their taxes go up,” said Donald Marron, director of the Tax Policy Center.
The tax cuts enacted under President George W. Bush benefited individuals and families across the income scale and included everything from increased child tax credits to lower capital gains rates. Many economists believe Congress will resolve its budget differences rather than risk plunging a fragile economy into recession, but it remains unclear when a compromise might be reached.
The top 1 percent might face tax hikes of more than 7 percent; middle-income families could see 4 percent increases.
The Obama administration and congressional Democrats want to extend the tax cuts for all but the wealthy, individuals earning more than $200,000 a year and couples earning more than $250,000. Republicans want to extend them for all taxpayers.
Even if Congress and the president agree to continue some or all of Bush tax rates, workers can still expect their paychecks to shrink next year, analysts said. The payroll tax cut — the 2 percentage point break in Social Security taxes enacted in 2010 — is due to expire.
It benefited anyone earning less than $110,100 annually and put an extra $1,000 into the average taxpayer’s pocket. But it was designed as a temporary measure to help stimulate the economy, and the Obama administration hasn’t taken steps to renew it.
US consumers, however, should continue to benefit from low borrowing rates. Republican presidential nominee Mitt Romney vowed to fire Federal Reserve chairman Ben Bernanke, but President Obama’s reelection means Bernanke’s and the Fed’s low-interest-rate policies aimed at spurring faster economic growth will continue.
The average rate for a 30-year fixed-rate mortgage, for example, was about 3.4 percent last week, according to Freddie Mac, the government-backed mortgage company.
If Congress takes no action on taxes, according to the Tax Policy Center, a household with an income of up to $20,000 a year would pay about $400 more in taxes, a middle-class household earning between $40,000 and $64,000 would pay about $2,000 more, and a household earning more than $108,000 could pay an additional $14,000.
If the cuts are not extended, said Douglas S. Stransky, a tax lawyer and partner at Sullivan & Worcester in Boston, married couples would pay a higher tax rate and mortgage interest rate deductions could be phased out for some income levels.
“Most households do not understand the full impact,” of the expiring cuts, Stransky said. “All people think about is what they heard in the election — about how millionaires and billionaires should pay more taxes. Sorry, but it’s not just going to affect them.”