Interesting Observations on ATRA

ATRA (American Taxpayer Relief Act) is the new tax policy for 2013 as a result of the Fiscal Cliff negotiations. Overall, if our primary goal was deficit reduction then the new law is a joke. I don't know why I'm so disappointed since it was stupid of me to think that we'd actually come up with something somewhat reasonable. Here's the ridiculous progression from where we started to where we ended up (realizing that we punted the spending cut debate for another two months):

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/02/the-fiscal-cliff-negotiations-in-one-chart/

I find it comical that we ended with less revenue from tax increases in the final deal than we did in either proposal from Boehner. Although, I'm not sure how definitive Boehner's tax increases really were. I get a sense the estimates for Boehner's two proposals shown in the link above were highly optimistic.

Anyway, here are the "interesting" observations so far:

1. The average American making between $200k - $500k made out very well relative to everyone else. Their change in after-tax income -- that's "cash income"* as defined by the Tax Policy Center (TPC) -- was the 2nd lowest (-1.3%) behind those making between $10k - $20k (-1.0%). In other words, the average middle-class (and upper-middle class) American, which I'll loosely define as someone making between $50k - $200k**, will see their after-tax income decrease, as a percentage of their cash income, more than the average American who makes between $200k - $500k.

Here's the distribution table:

http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3755&DocTypeID=1

Relatively speaking, this sounds like a lousy deal for the middle and upper-middle classes who saw their after-tax income decrease between 1.5% - 1.7%. Of course, let's not freak out too much since we're only talking about .4% here.

2. Personal Exemption Phaseout (PEP) and Pease (the limitation on itemized deductions named after the congressman who introduced it) will account for the second-largest increase in potential revenue yet they were never really discussed in the press as being a factor.

Now, some people are complaining about how much PEP and Pease will affect taxpayers who make >$250k/$300k (single/married). From what I'm reading so far, it's mostly GOP/conservatives, some religious organizations and nonprofits focused on charitable giving, and some home builder associations. It should give you a sense of how difficult it will be to truly simplify the tax code and eliminate most of these ridiculous loopholes and subsidies.*** It's like the saying goes, "It's a great idea until it impacts you."

The fundamental problem with PEP and Pease is that they add to the complexity of our tax code rather than reduce it. For example, I'm sure most people who are reading this are saying, "WTH is PEP and Pease???"

I will add other interesting observations to this list as I see them in the coming days…

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* -- Cash income is different than Adjusted Gross Income (AGI), which is what everyone sees on their IRS form. Cash income is used by the TPC because it's a better reflection of the taxpayers' ability to pay tax. See: http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=574.

** -- It's certainly debatable about where the income level starts and ends for what I'm calling "middle" and "upper-middle" classes. Considering those who make $200k puts you in the ~94th percentile, it's probably a stretch to call them upper-middle class. Keep in mind, there really is no official definition though.

*** -- I don't consider charitable giving to be either ridiculous or a subsidy. However, I do have very mixed feelings about religious organizations receiving tax-exempt status. Although, I do think the positives outweigh the negatives.