What Happens If the Bush Tax Cuts Expire?

Dec. 13, 2012 -- Editor's Note: This is the latest in an ongoing series about the building blocks that lawmakers could put on the table as they search for a deal to avert the fiscal cliff.

Determining whether the nation heads over the "fiscal cliff" in the New Year could come down to an agreement on how to deal with the Bush era tax cuts, which are set to expire at the end of the month.

Democrats want to extend the tax cuts for the middle class while letting them expire for the top 2 percent of earners, specifically individuals making more than $200,000 a year or households bringing in more than $250,000 annually. Republicans, on the other hand, want to continue the tax cuts for all taxpayers, and instead are calling for the elimination of loopholes and deductions to achieve new revenue, a move Democrats say is not enough.

If Democrats get their way, letting the Bush-era tax cuts expire for those earning more than $250,000 would mean a $849 billion increase in taxes over the next ten years, according to data from the Department of Treasury. This would be achieved through a mix of changes, including a decrease in itemized deductions and personal exemptions, changing the tax rate to 36 percent and 39.6 percent for upper income earners, taxing qualified dividends as ordinary income, and setting the capital gains tax rate at 20 percent.

Related: Fiscal Cliff Negotiators search for cuts without sacrifice.

But what happens if Democrats and Republicans can't reach an agreement by the end of the year and the Bush-era tax cuts expire for all Americans?

A report by the Tax Policy Center says taxes would rise by over $500 billion in 2013 if the nation heads over the "fiscal cliff." This averages out to a $3,500 increase for the average American household due to the expiration of the Bush tax cuts and the payroll tax holiday.

A recent report released by the National Economic Council and the president's Council of Economic Advisors found that a typical middle class family of four would experience a tax increase of $2,200 if the Bush era tax cuts expire.

Related: Why changing Medicare is so controversial.

For Charlotte Brock, a single parent from the Washington, D.C. area, that tax increase would make it harder to pay for child care for her 2-year-old son, Gabriel.

"Seeing that child care is about $15,000 a year in this area, that's a significant chunk of that," Brock, who is a member of MomsRising, a grassroots organization promoting policies that benefit families, said. "That would make it even more difficult to buy the groceries we need to pay the rent, pay the childcare, pay for clothes. All of those things, they have to come from somewhere."

An increase in taxes would also mean a tightening of consumers' wallets. The National Economic Council and the president's Council of Economic Advisors report said tax hikes could lead to consumers spending $200 billion less than expected in 2013, an amount which equals more than 3 percent of GDP.

Couple the increase in tax rates with the failure to patch the Alternative Minimum Tax and real consumer spending could fall by an estimated 1.7 percent in 2013, according to the National Economic Council and the president's Council of Economic Advisors report. This could lead to the slowing of growth of real GDP by 1.4 percent.

Allowing the Bush era tax cuts to expire would include lowering the amount of the child tax credit from $1,000 per child to $500 per child, narrowing the tax bracket for married couples causing them to pay more, and reducing itemized deductions and personal exemptions.