Update, Dec. 31, 4:45 p.m.: House Republicans said late Monday afternoon that they would adjourn without voting on a potential Senate deal to avoid the fiscal cliff. Follow the latest news from Congress.
The fiscal cliff. It’s the most boring political story of the year. It has none of the human drama of an election campaign. None of the white-knuckle terror of a financial system calamity. Just a lot of endless, tedious negotiations leading up to the inevitable deal. Except here we are—Dec. 31, 2012, and there’s no deal in place. We’re going to go “over the cliff.” Probably not forever. Probably some deal will pull us partially back in January. But for a little while at least, we’ll be cliffed. You may be sitting around on a Monday thinking about tonight’s party and mildly regretting having skipped past all of the past two months’ worth of fiscal cliff stories. It’s all about to happen, but you have no idea what it means. In particular, what does going over the cliff mean for you? Well, that all depends on who you are. Fortunately, I’m here to help you figure it out.
Are you a low-income, retired person who relies overwhelmingly on Social Security benefits for money? If so, you just hit the fiscal cliff jackpot. You don’t pay any taxes, so your taxes won’t go up. And Social Security cuts aren’t part of the cliff. In fact, quite the opposite. Virtually all the deals that have been in play in Congress this month involve averting the fiscal cliff in part by cutting Social Security by changing the cost-of-living adjustment formula. If you’re smart, you should hope there’s never a deal.
Do you supplement your labor, pension, or Social Security income with dividend income? To the extent that you do, you’re totally screwed. Taxes are set to go up across the board, but the scheduled rate increases on dividend income are much higher than the rest. Kindly firms like Slate’s parent company have been dealing with this by paying big “special” dividends in December to disgorge corporate cash in today’s low-tax climate rather than waiting for what may be a rough 2013.
Do you build wind turbines? Bad news. The production tax credit on which your industry depends is going away, and work may all but vanish for a while.
Are you a full-time student with no job? You’re in the clear. The perfect example of someone unaffected by the cliff. Unless, that is, the cliff hits your parents in the pocketbook so hard that they cut you off and you have to go get a job.
Have you been collecting Unemployment Insurance for more than 26 weeks? You’re out of luck. The federal program providing funding for extended UI coverage is expiring. And you’re the opposite of the Social Security moocher. Reduced Social Security benefits was a concession the White House was clearly willing to make to get a deal, but securing funding for extended UI was a key thing the administration was looking for. In the new baseline, there’s a decent chance UI will end up being lost in the shuffle as future negotiations focus on tax issues.
Do you have a job? Get ready to pay higher taxes. If you have an Adjusted Gross Income of less than $250,000, the odds are overwhelming that Congress and the White House will soon work out a deal to put your tax rates back down again. But even so, the payroll tax holiday is expiring and won’t be coming back. That money’s going to be taken right off the top of your paycheck.
Are you self-employed? Same deal, but this time the money won’t be taken off the top, so you need to remember to calculate for the need to pay higher taxes in April as your money comes in.
Do you directly or indirectly work for the government? If so, you’re set to be hit by the sequestration provisions of the Budget Control Act of 2011. That means about $1.2 trillion in cuts over the next 10 years, divided about equally between defense and non-defense provisions. Social Security benefits and most assistance to the poor are exempt, but that means big cuts to the rest. Federal civilian employees, manufacturers of military equipment, Medicare providers, and other government contractors will be hit hard. So will lots of service providers in the D.C. metropolitan area whose incomes depend indirectly on federal funding streams.
This is basically bad news all around. But note that it’s especially bad news for rich people and people living in the Washington, D.C., area. You’ll probably have noticed that high-income individuals living in the D.C. area have disproportionate influence over the political press, which is one reason there’s been so much fiscal-cliff hype. A deal to at least relieve the middle-class tax aspect of the cliff will probably pass in January when the new baseline lets everyone call the deal a “tax cut” and undo much of the harm to the non-rich.