Category Archives: off the fiscal cliff

Should We Go Off the Cliff: The Rationale

Many economists and others believe that we should do only the things we must to avoid sequestration and that we should raise taxes on the wealthy and we should deal with some of the tax loopholes and raise the debt ceiling, but we really need to do more right away in stimulating growth in the economy through doing what is necessary to make more jobs available, more jobs that pay a living wage and have a path to advancement, and we need to tackle infrastructure and education.

From Huffington Post:

So, the big takeaway is that we should never do this again? Should we trust Congress when they say they will meet in a committee to draw up substantial spending cuts? Going forward, it’s going to be hard to do so. The good news, however, is that if we can avoid the nonsensical level of fiscal austerity that the sequestration is threatening, Congress can start work on a more critical, near-term project that I like to call “ameliorating the negative effects of that gigantic financial collapse that happened four years ago.” Getting the long-term budget trajectory in line is something that can be safely put off until after we’ve solved the unemployment and foreclosure crisis, and we’ll have already gotten a good head-start on that once the Clinton-era tax rate levels on upper-income earners are restored. This is what the American people want Congress to do anyway — as usual, they do not give a tinned turd about the deficit.

Jason Linkins, author

From The Examiner:

“In August 2011, bipartisan majorities in both the House and Senate voted for the threat
of sequestration as a mechanism to force Congress to act on further deficit reduction. The specter of harmful across-the-board cuts to defense and nondefense programs was intended to drive both sides to compromise. The sequestration itself was never intended to be implemented. The Administration strongly believes that sequestration is bad policy, and that Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package.

As the Administration has made clear, no amount of planning can mitigate the effect of these cuts. Sequestration is a blunt and indiscriminate instrument. It is not the responsible way for our Nation to achieve deficit reduction. The President has already presented two proposals for balanced and comprehensive deficit reduction. It is time for Congress to act. Members of Congress should work together to produce a balanced plan that achieves at least the level of deficit reduction agreed to in the BCA that the President can sign to avoid sequestration.”

When it comes to non-defense spending cuts, they will be wide-spread as the law requires. Medicare will be cut 2% which is the maximum the law allows Medicare to be cut. Other mandatory qualification-based domestic programs like Medicaid, Food Stamps, etc will be cut 7.6%.

Domestic discretionary programs such as scientific grants and Education Department programs will be subject to 8.2% cuts across the board. Congress and the White House also get their budgets cut. Pell grants, food safety, the FAA, FEMA, farm programs also get cut 8.2%. These cuts will hit nearly every agency of government.

Most people when asked are for spending cuts at least until the cuts affect a program they like or use. Then, the attitude changes. Cut everything else, leave my program alone.” When everyone says that, nothing gets cut. That is why we have the debt.

The problem with this plan, however, is two-fold. First, the cuts are not strategic. They are not based on the cost-effectiveness of a program. They are across the board.

Secondly, economists warn that austerity at this point in the recovery would cut GDP, slow the recovery, or perhaps send us back into recession. An average cut of 8.2% in federal salaries alone will mean tremendous layoffs. So will cuts by defense contractors. That will raise the unemployment rate, hurt consumer spending, stifle small business, and throw ice on the recovery.

Despite the severity of the problem, nothing will happen until after the election—if then.

Meanwhile, taxpayers are paying the salaries, expenses, and medical plans for Congress to do-nothing.

From The New York Times for November 26th, 2012 here is what Paul Krugman has to say:

But the deficit scolds aren’t giving up. Now yet another organization, Fix the Debt, is campaigning for cuts to Social Security and Medicare, even while making lower tax rates a “core principle.” That last part makes no sense in terms of the group’s ostensible mission, but makes perfect sense if you look at the array of big corporations, from Goldman Sachs to the UnitedHealth Group, that are involved in the effort and would benefit from tax cuts. Hey, sacrifice is for the little people.

So should we take this latest push seriously? No — and not just because these people, aside from exhibiting a lot of hypocrisy, have been wrong about everything so far. The truth is that at a fundamental level the crisis story they’re trying to sell doesn’t make sense.

You’ve heard the story many times: Supposedly, any day now investors will lose faith in America’s ability to come to grips with its budget failures. When they do, there will be a run on Treasury bonds, interest rates will spike, and the U.S. economy will plunge back into recession.

This sounds plausible to many people, because it’s roughly speaking what happened to Greece. But we’re not Greece, and it’s almost impossible to see how this could actually happen to a country in our situation.

He has more to say. You can find his article at this link:

I think many of us are perplexed by the complexity of the issues involved in dealing with all of these things at one time:  decide what to do about taxes, decide what to do about budget cuts, decide what to do about the debt, decide what to do about the deficit, decide what to do about tax loopholes, decide whether or not to simplify the tax code, decide how best to stimulate job growth, decide what to do about “entitlements”, and make sure we keep inflation low while we tackle and solve all these issues. Solve them? That could take several lifetimes. Pick a direction and see how it works while keeping in mind that we may have to try something else? That’s probably more like it. Why are we trying to accomplish all of these things at once. 
Let’s deal with one or two things at a time. Raise the debt ceiling and raise top tax rates. Just do it! Make some careful cuts but leave “entitlements” alone for now. Tackle education and infrastructure to help grow jobs, but make sure to chose projects that really will help. In terms of education spend money to train people for those jobs that are going unfilled. In terms of infrastructure look at how to get the most bang for our buck. What parts of our infrastructure will help jobs or trade or business. If we have solved the problem of the water resources in Nebraska build that Keystone Pipeline the Republicans want so much. Then make some more cuts and begin work on “entitlements” only if necessary.
Doing this all of the things we need to do at one time is huge and it is like trying to straighten out a giant pretzel. Oh, but I forgot, the whole idea is just to obfuscate the process by focusing everywhere but the taking care of budget business. We may have to take to the streets on this one. Get your signs ready!   (My view represents the view from the cheap seats.) 

 

 

 

 

Should We Go Over the Cliff: The Numbers

What does sequestration mean in terms of cuts – how much and to whom?

·         $900 billion in cuts in discretionary programs over the next decade

·         Would impose further automatic across-the-board spending cuts in many programs, unless Congress enacts an additional 1.2 trillion in deficit-reduction measures by Jan. 15, 2012

·         Would take effect in Jan., 2012

·         9% annual cuts in non-defense programs

·         9% cuts in defense programs for each year from 2013-2021

·         New Budget Control Act which implements the debt limit deal

o   Raises debt limit by 2.1 trillion in steps

o   Establishes binding “caps” on annual appropriation bills covering non-entitlement spending – e.g. defense, education, National Parks, FBI, EPA, low-income housing assistance, medical research, etc.

o   Requires Congress to vote on balanced budget amendment this fall

o   Establishes a Joint Select Committee to draft, vote on by Nov. 23rd and report by Dec. 2nd this year – definite reductions through 2021 beyond the $900 billion – if they fail that will touch off automatic cuts known as sequestration

·         Cut 54.7 billion from defense each year from 2013-2021

·         Cut 54.7 billion from non-defense programs each year from 2013-2021 from both mandatory (entitlements) and discretionary programs

Mandatory cuts:

·         Cuts Medicare payments to providers and insurance plans (limited to 2%)

·         5.2 billion to other mandatory programs like farm price supports

·         Social Security, Medicaid, CHIP, SNAP (food stamps), child nutrition, SSI, refundable tax credits, like Earned Income Tax Credit, veterans benefits and federal retirement are exempt from sequestration

That leaves 38.6 billion in non-defense cuts which would come from

·         Across-the-board cuts for discretionary programs except Veteran’s Medical Care and Pell Grants

·         2014 – 2021 – reduction in statutory caps on total funding

I guess what I didn’t realize that these cuts would happen every year for 10 years, although years 2-10 would be configured in a different way. Yikes!

 

 

 

 

 

 

 

 

Taxes By Income If We Go Off the Cliff

 
Who will be affected if a budget deal is not reached and how? The Wall Street Journal published some interesting data in answer to this question on Wednesday, November 21, 2012 in its print edition. Of course the WSJ skews conservative Republican, but they also are our financial race track sheet for stocks, bonds, and commodities, so, hopefully, we can trust them to give numeric data that is not too skewed.

In this chart WSJ shows what % of tax increases, and therefore of the fiscal burden, would affect which group of American tax payers: 
 
 

They also give us some concrete examples:

First:  A higher-income working couple  (if Bush tax cuts disappear and if AMT relief goes away and investments get hit by higher rates in dividends and capital gains)

Income Example: $350,000

Federal tax change in dollars: $13,847, 20.3% tax change, 29% tax rate, 4.9 points up

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Second:  A Single Unemployed person (will have some of the largest tax increases with loss of benefits for working poor being a big factor)

Income Example: $10,000

Federal tax change in dollars: $159, 55.5% tax change, 8.4% tax rate, 3.0 points up

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Third:  Lower income working couple

Income Example: $25,000

Federal tax change in dollars: $1,423 (previously this group got a $15 refund), 5.5% tax rate, 5.6 points up

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Fourth:  Higher Income Professional (will lose protection from Alternative Minimum Tax)

Income Example: $150,000

Federal tax change in dollars: $6,662, 24.5% tax change, 24.5 tax rate, 5.0 points up

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Fifth:  College Student (will lose education breaks, payroll tax holiday)

Income Example: $15,000

Federal tax change in dollars: $308, 37.9% tax change, 7.5% tax rate, 2 points up

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Sixth:  Retiree Household (will lose Bush-era tax rates)

Income Example: $35,000

Federal tax change in dollars: $540, 42.4% tax change, 5.1% tax rate, 1.5 points up

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Seventh:  Very High Income Household (their federal tax bill would rise, yet share of overall federal tax would go down because the impact of the fiscal cliff on lower earners would be so great)

Income Example: $1 million or more

Federal tax change in dollars: $254,637, 24.2% tax change, 39.7% tax rate, 7.7 points up

 

You will have to judge for yourself whether, based on this information, you will be able to survive if you personally are taken over the fiscal cliff.