What Happens If the Bush Tax Cuts Expire?

PHOTO: Former United States President George W. Bush smiles as he watches a baseball game between the Detroit Tigers and the Texas Rangers, Friday, Aug. 10, 2012, in Arlington, Texas.
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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.

Related: Can the mortgage deduction survive the fiscal cliff?

The tax cuts in question were initially proposed by President George W. Bush and passed by Congress in 2001 and 2003, but the law came with a 2010 expiration date. President Obama and Republicans worked out a deal to extend the Bush era tax cuts in 2010 for another two years, bringing the country to the current predicament.

Democrats and Republicans have made little headway in fiscal cliff negotiations. Obama has dug in on the imperative to extend the rates for middle class earners while allowing the tax cuts for the wealthy expire.

"I'm not going to sign any package that somehow prevents the top rate from going up for folks in the top 2 percent," Obama said during a visit with a middle class family in northern Virginia Thursday.

"The only obstacle standing in the way of middle-income tax relief are the Republicans' unwillingness to ask the top 2 percent to pay their fair share," House Democratic Leader Nancy Pelosi said Friday. "This is a moment of truth. The clock is ticking. Christmas is coming. The goose is getting fat. But in many homes across America, it's very -- a very, very lean time."

But Republicans are not willing to budge on the issue and are calling for the president to agree to greater cuts to entitlement spending.

"There are a lot of things that are possible to put the revenues that the president seeks on the table, but none of it's going to be possible [if] the president insists on his position, insists on 'my way or the highway,'" House Speaker John Boehner said Friday. "That's not the way to get to an agreement that I think is important for the American people and very important for our economy."

Related: Ending charitable deduction would help budget, hurt charities.

Want to see how each of the plans would affect your taxes? The Tax Policy Center has a calculator that shows the impact each plan will have on your taxes.

Read more about the Fiscal Cliff:

Related: What the average American should know about capital gains and the fiscal cliff.

Related: Can the mortgage deduction survive the fiscal cliff?

Related: Why changing Medicare is so controversial.

Related: Fiscal Cliff negotiators search for cuts without sacrifice.

Related: Ending charitable deduction would help budget, hurt charities.

Related: Meet a 'small business' at center of 'fiscal cliff' debate.

Related: Corporate tax loopholes and the 'fiscal cliff'.

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