Much of the attention has focused on the expiration of Bush-era tax cuts that would benefit the wealthy. President Obama has indicated he opposes any agreement that would extend tax cuts on those with household incomes above $250,000, while House Speaker John Boehner (R) of Ohio believes allowing higher rates on upper-income Americans would slow job growth. Mr. Boehner has implied that the wealthy could pay more by reducing the tax deductions they receive – but not by increasing their marginal tax rates.
Yet many of the tax increases that would occur if the fiscal cliff takes effect would fall on middle-income Americans. A household earning $50,000 per year, for instance, would see its taxes grow by $2,000 in 2013, according to the Tax Policy Center. That's in addition to the planned expiration of tax credits for low-income earners and college students passed in 2009 as part of the economic stimulus package.
One of the biggest impacts would come from failing to fix the AMT, or alternative minimum tax. When it was first passed, the AMT was designed to prevent rich people from exploiting loopholes to avoid paying income taxes. But because the AMT wasn't indexed for inflation, it has hit more middle-income families over time. While Congress has acted each year to limit how many people are affected by it, an unresolved cliff package would lead to a nearly sevenfold increase in the number of Americans (from 4 million to about 30 million) who would be affected by the law when they file their 2012 income taxes in the new year.
"You will have 30 million angry constituents and they will ask you why," says John Buckley, a professor of tax law at Georgetown University Law School in Washington, who adds: "I don't think Congress can tolerate that."
Because of the 401(k) effect.