July 2012

Iowa Taxpayers Must be Aware of Taxmageddon

by John R. Hendrickson

Taxpayers in Iowa need to be aware of the looming tax hikes that will take place in January 2013 unless Congress and President Barack Obama cooperate to prevent a massive tax increase on an already fragile economy. This tax increase is referred to as “taxmageddon” because of its dangerous and crushing impact it will have on the economy. Taxmageddon is a “one year $494 billion tax increase that looms on January 1, 2013.”[1] This across-the-board tax increase is already causing further uncertainty in the economy.

Part of taxmageddon will be the expiration of the Bush tax cuts (2001 and 2003), which were previously renewed by Congress and President Obama. If the Bush tax cuts are not renewed it will result in a significant tax increase. As explained by Americans for Tax Reform:

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which the majority of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

  • The 10% bracket rises to a new and expanded 15%
  • The 25% bracket rises to 28%
  • The 28% bracket rises to 31%
  • The 33% bracket rises to 36%
  • The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level.

Middle Class Death Tax. The death tax is currently 35% with an exemption of $5 million ($10 million for married couples). For those dying on or after January 1, 2013, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 23.8 percent in 2013. The dividends tax will rise from 15 percent this year to 43.4 percent in 2013. This is because of scheduled rate hikes plus Obamacare’s investment surtax.[2]

Allowing the Bush tax cuts to expire will not only result in a tax increase on individuals, families, and businesses, but it will also result in harm to an already fragile economy. Other tax increases that will also occur include taxes within the Patient Protection and Affordable Care Act, more taxpayers being hit by the Alternative Minimum Tax (AMT), and an increase in employer taxes.[3] The Heritage Foundation explained the breakdown of the tax increases:

Almost 34 percent of the tax increases from Taxmageddon come from the expiration of the 2001 and 2003 Bush tax cuts. Another 25 percent comes from the expiration of the payroll tax cut. Most of the remaining increases come from the Patient Protection and Affordable Care Act, notably from the start of the hospital insurance 3.8 percent surtax on all forms of income over $250,000.[4]

The Heritage Foundation estimates that “the average American household would see its taxes rise by $3,800 in 2013 alone,” which could continue to increase in the future.[5] President Obama and many Democrats in Congress are arguing that the Bush tax cuts should not be renewed, because the more prosperous Americans can “pay their fare share.” “Although proponents claim that these tax increases will only affect the wealthy, this looming tax grab will also have a significant impact on middle-class Americans who don’t have to pay it directly,” noted Merrill Matthews a columnist for Investor’s Business Daily.[6] The class warfare rhetoric being used by the Administration will not work, because this tax increase will affect all citizens:

Taxmageddon falls primarily on middle and low income Americans. That’s because 60 percent of the Bush tax cuts went to middle and low income taxpayers. The expiration of the patch on the Alternative Minimum Tax (AMT) will cause these taxpayers to pay a tax they were never supposed to be hit with, and the expiration of the payroll tax cut is a tax hike almost exclusively on middle and low income families. That’s just the direct impact. Americans at all income levels will feel the pain of Taxmageddon because it will slow job creation and wage growth.[7]

More specifically, the effect of taxmageddon will be hard on Iowa’s taxpayers. The Heritage Foundation estimates that taxmageddon will cost $3.59 billion for our state or $2,491 per tax return.[8]

Taxmageddon is already causing uncertainty in the economy. “The uncertainty is slowing the economy because businesses, investors, and entrepreneurs can’t plan for the near future,” explained Curtis Dubay, a Senior Policy Analyst at The Heritage Foundation.[9] As Dubay further explains:

Because [businesses] they don’t know what their taxes are going to be in just a few months. If they don’t know what their taxes will be, there is no way for them to determine if their potential job-creating investments would be profitable. Without being able to make that vital calculation, there is no way they can move forward on projects that would speed growth and create much needed jobs. So they’re sitting back, waiting for Congress to provide some certainty.[10]

This uncertainty only adds to the other problems facing the economy such as high unemployment (8.2 percent or 15 percent when those who are either underemployed or discouraged from looking for work are taken into consideration), uncontrolled spending that has fueled a national debt of over $15 trillion, and an unstable global economy, especially emerging from Europe.

President Obama continues to propose the same policies that have failed to generate economic recovery. These policies include stimulus or “investment” spending, increased levels of regulation, and the Patient Protection and Affordable Care Act. The uncontrolled spending has failed to resolve unemployment and it has only resulted in increasing our national debt and running annual trillion dollar deficits. In addition, record numbers of Americans have to rely on some form of government assistance because they cannot find work or are underemployed.

“The problem is that Obama’s growth-choking policies have produced the worst economic recovery on record,” argued a recent editorial from Investor’s Business Daily.[11] It is unclear if policymakers will act to prevent taxmageddon from occurring next year, but it is essential that not only is this tax increase prevented, but policymakers reestablish policy certainty.

Establishing policy certainty over the economy will require two important policies: include tax reform that lowers tax rates and reducing government spending. Both reducing spending and tax rates will send a signal to the economy that policymakers are addressing the fiscal crisis and working to implement fundamental policies that will bring about tax reform and spending cuts. Policymakers must also begin the process of reviewing regulations and removing the shackles of unnecessary regulation. The Patient Protection and Affordable Care Act should also be repealed by Congress, that is, if the Supreme Court does not strike it down as unconstitutional.

Following an economic policy approach of lowering tax rates and reducing spending will result in economic growth. History has demonstrated this fact and even recently with the positive impact of the Bush tax cuts as economic historian Burton Folsom, Jr., argues:

The Bush tax cuts, passed in 2003, did three things: first, they cut the top rate on the income tax from 39.6 to 35%; second, dividend tax rates were cut from 39.6 to 15%; and third, the capital gains tax was cut from 20 to 15%. When those cuts became law, the U.S. economy, still reeling from 9/11 and also the dot.com bubble, came storming back to life. In the next four years, household net worth jumped almost 50%; employment skyrocketed by 2,000,000 jobs each of the next four years; and more millionaires began paying taxes from ever larger incomes. In 2003, according to Art Laffer and Steve Moore, 17,294 Americans paid taxes on more than $5 million income. In 2007, that number soared 137% to 40,931 Americans who paid taxes on incomes over $5 million. The stock market rose, and revenue into the federal government sharply increased.[12]

Preventing taxmageddon will be essential in order to prevent the economy falling back into recession or even another depression, but policymakers must begin to realize the necessity of lowering tax rates and reducing federal spending. Only then will certainty return to the economy and confidence be restored. 

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Curtis Dubay, “Taxmageddon is slowing the economy now,” The Foundry: Conservative Policy News from The Heritage Foundation, The Heritage Foundation, June 20, 2012, <http://blog.heritage.org/2012/06/20/taxmageddon-is-slowing-the-economy-now/> accessed on June 20, 2012.

[2] Americans for Tax Reform, “Taxmageddon is January 1, 2013,” posted by Ryan Ellis, Americans for Tax Reform, April 9, 2012, < http://www.atr.org/taxmageddon-january-a6831> accessed on June 20, 2012.

[3] Ibid.

[4] The Heritage Foundation, “Taxmageddon: Massive Tax Hikes on January 1, 2013,” Factsheet No. 104, April 11, 2012, The Heritage Foundation, Washington, D.C., <https://thf_media.s3.amazonaws.com/2012/pdf/FS104.pdf> accessed on June 21, 2012.

[5] Ibid.

[6] Merrill Matthews, “There’s a triple tax increase in your future,” Investor’s Business Daily, June 19, 2012, <http://news.investors.com/article/615356/201206191753/if-bush-tax-cuts-expire-taxes-will-triple-for-some.htm> accessed on June 20, 2012.

[7] “Taxmageddon: Massive Tax Hikes on January 1, 2013.”

[8] The Heritage Foundation, “The effects of taxmageddon on Iowa,” Taxmageddon Interactive Map, The Heritage Foundation, Washington, D.C., < http://www.heritage.org/multimedia/infographic/2012/taxmageddon/iowa> accessed on June 21, 2012.

[9] Dubay.

[10] Ibid.

[11] Editorial, “No, we’re not better off than we were four years ago,” Investor’s Business Daily, June 20, 2012,

< http://news.investors.com/article/615582/201206201901/obama-has-made-things-worse.htm> accessed on June 21, 2012.

[12] Burton W. Folsom, Jr., “Can we blame President Bush for everything?” Burt Folsom: Where History, Money, and Politics Collide, June 20, 2012, <http://www.burtfolsom.com/?p=1822&utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Burtfolsomcom+%28BurtFolsom.com%29> accessed on June 21, 2012.