Whichever party wins the White House in November, they will not have long to celebrate. On December 31st a slew of existing tax cuts will expire and some brand new Obamacare taxes are set to come on line.
All of the Bush tax cuts are set to disappear, which means the rate everyone pays on the first $8,700 of wages will jump from 10 percent to 15 percent. The Social Security payroll tax will jump back to 6.2 percent from 4.2 percent. And new Obamacare taxes on investment income will also hit for the first time. According to The Washington Post, the total ‘taxmageddon’ bill is scheduled to take about $500 billion out of the private economy 2013 alone.
How will all this play out? A freshman Republican outlined four possible scenarios this morning:
Republicans win White House and Senate: If Republicans win the White House and Senate you can expect to see a short-term (three to six months) extension of all current tax rates passed before December 31st. After the new president was sworn in, Congress would enact sweeping tax reform, much along the lines of what The Heritage Foundation has in their Saving the American Dream plan. It would simplify the tax code, close loopholes, and lower most tax rates, just as President Reagan’s Tax Reform Act of 1986 did. Taxes as a percentage of GDP would return to their historic 18 percent average.
Republicans win White House Democrats keep Senate: In deference to the new president, Senate Democrats would again pass a short-term extension of current tax rates, but the extension would not be as long (maybe a month). The new president would then have to cobble together a much less sweeping tax reform to beat the new deadline. The final deal would have higher rates and keep more loopholes.
Obama keeps White House, Republicans win Senate: Claiming a mandate, Obama would demand tax hikes on those making more than $250,000. House Republicans would cave and agree to a two-year deal along Obama’s lines before the December 31st deadline. There would be no comprehensive tax reform and the Obamacare tax hikes would begin on schedule.
Obama keeps White House, Democrats keep Senate: House again caves on extending the Bush rates before the December 31st deadline. Obama also muscles through higher taxes on corporations, especially those that produce fossil fuels and those who do business overseas. Taxes as a percentage of GDP rocket past the historic 18 percent average.