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Fiscal Cliff Deal's Income Tax Hike Hits Less Than 1 Percent Of Taxpayers

01/02/2013 02:47 pm ET
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Forget the 1 percent, the fiscal cliff deal is all about the .7 percent. That's the slice of Americans who will be affected by Congress' new definition of "wealthy," according to a new analysis from the Tax Policy Center, a nonprofit tax research group.

The centerpiece of the deal passed by Congress on Tuesday includes higher income taxes on individuals who make at least $400,000 and couples who make more than $450,000. The tax rate for those groups jumps to 39.6 percent from the current 35 percent.

Under earlier proposals from President Barack Obama and Congressional Democrats, the wealth limit for the top tax bracket was $250,000. Under that lower income threshold, up to 1.3 percent of taxpayers would have been affected by the higher rate, according to tax researcher Joseph Rosenberg at the Tax Policy Center.

Either way, the tax rate increase is more symbolic than anything else -- economists and analysts say the wealth limit does little to fix budget woes. "It's not going to make a dent in the deficit and it's the least painful of the tax increases that hits upper income," Chris Low, chief economist of financial services company FTN Financial, told The Huffington Post.

Critics also say the new definition betrays President Obama's pledge to tax the wealthy. "Obama may think his conciliatory approach has helped avoid economic chaos. Instead, he is courting it," wrote New York Magazine political commentator Jonathan Chait last week.

The newly defined wealth limit also applies to tax hikes on capital gains and investment income, which will now be taxed at a 20 percent rate, up from 15 percent for those earning $400,000 or more. Even that represents a shift from Obama's original tax plan that called for rates as high as 23.8 percent on capital gains for the wealthiest Americans.

While all the talk is about the new tax-rate increases on the wealthy, the reality of the fiscal cliff deal is that taxes are going up for most working Americans via the expiration of the payroll tax holiday. Seventy-seven percent of American households will face higher taxes under the deal, mostly because of the rise in the payroll tax to 6.2 percent from 4.2 percent.

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