I don’t know about you, but I am bored to death with the Fiscal Cliff obsession. This may be the signle greatest example of excess media hype since Y2K. We find out how devastating this will be very soon. I do not believe history will look back kindly at how many people and institutions handled themselves over this period. (Pathetically irresponsible are the first words that come to mind).

What is causing all the sturm und drang? Is this really a Mayan apocalypse of expiring tax breaks and sequestered spending cuts.

Hardly — here is what we are discussing, in terms so simple even a congressman could understand it:

Bush tax cuts expire; tax rates revert to Clinton-era levels. Recall this was originally designed to get rid of that pesky surplus (mission accomplished), and to expire in 10 years. It is now year 13;

Top marginal rate go from 35% to 39.6%; Middle-class tax payers see increases of ~$2,200 per year;

Payroll tax cut stimulus expires; Americans will go back to paying 6.2% up from the current 4.2%, this rate applies to the first $113k of income.

Unemployment insurance expires for 2.1 million long-term unemployed, with another 1 million Americans scheduled to see those benefits terminate Q1 2013.

Sequestration kick in. $1.2 trillion in cuts spread out over the next decade. (That’s hardly a cliff after all).

Specific Savings: $492 billion come from Defense; half from discretionary programs (non defense, non entitlements). That adds up to $984 billion — the balance of $1.2 trillion are interest rate savings on the smaller debt.

Annual Spending Cuts: The specific savings amounts to $55 billion in Pentagon cuts plus $55 billion from non-defense discretionary programs.

Alternative Minimum Tax patch expires. A messy set of repairs to that operates to fix the simple error of the AMT not being inflation adjusted since 1969.

• Medicare doctor payment adjustments: Another annual fix-the-original-error expires tomorrow. Without this, Medicare doctors get a 26.5% Medicare payment reduction.

All Most of these will be phased in over the next year and decade. For example, the tax rate increase won’t have to be paid until you file your taxes in April 2014.

None of these are simple or painless, but they hardly amount to the world ending depression many are claiming. It will be a minor drag on the economy at a time when it is still soft, not yet fully recovered from the financial crisis.

All of the above is the opposite of classic Keynesian stimulus — raising taxes and cutting spending during economic weakness (then reversing it during strength). Those of you who are anti-Keynes should therefore be rooting for this.

 

Sources:
Falling Off the Fiscal Cliff
Jason Saving
Dallas Fed, December 2012 
http://www.dallasfed.org/research/eclett/2012/el1214.cfm

The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ
Suzy Khimm, Ezra Klein, Dylan Matthews and Brad Plumer
Washington Post, December 3, 2012  
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/27/absolutely-everything-you-need-to-know-about-the-fiscal-cliff-in-one-faq/

The Guide to Going Off the Cliff
George Zornick
Nation, December 29, 2012 
http://www.thenation.com/blog/171932/guide-going-cliff#

 

 

Category: Taxes and Policy, UnGuru

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “So Simple Even A Congressman Could Understand It…”

  1. Westport R says:

    There you go again, throwing the sand of reason in our eyes…. ;-0 How can we toughen up the leather in our lungs when you disabuse our bumpersticker thinking?

    Please, sir, leave us to our memes!

  2. BusSchDean says:

    Well done! The cliff we are going over is the deep drop of confidence in our political process.

  3. call me ahab says:

    Who’s scared? I remain unafraid- bring it on.

    [people by nature adapt and survive . . .this is nothing]

  4. xatta says:

    I’d like to see the math and/or assumptions behind item number 2. If you use a median household income of around $50,000 to represent “middle class” then increasing the top marginal rate (key word here is “marginal”) by a few percent is not going to generate $2200 in tax.

    ~~~

    BR: See these reports for that data:
    Tax Policy Center Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?

    Tax Foundation: How Would the Fiscal Cliff Affect Typical Families in Each State?

  5. Petey Wheatstraw says:

    BusSchDean:

    You are correct. There’s also the nasty little fact that a certain political element wants to drown our government in a bathtub (to be replaced by god only knows what kind of monstrosity). They’re almost there. Here’s hoping the People wake the F up.

    Good fortune in the New Year to you, BusSchDean, BR, and all of the other commenters who make TBP such a good place to hang out.

  6. call me ahab says:

    Some more cliff headlines:

    “Physicians Brace for Medicare ‘Doc Fix’ Cliff”

    “Asia’s Stock Rally Could Hit a ‘Cliff’ in 2013″

    “Middle Class Gets ‘Cliffed’ by Huge Tax If No Deal”

    “House prepares three ‘milk cliff’ bills”

    “Container Cliff Averted: Dock Workers and Ports In Tentative Agreement, No Strike”

    And to think of a more serene time . . .a cliff-less time- those were the days

  7. YouthInAsia says:

    xatta:

    http://en.wikipedia.org/wiki/United_States_fiscal_cliff#Effects_of_tax_increases

    I’m guessing the $2200 is a median increase

  8. BusSchDean says:

    Petey,

    Same to you and best wishes to BR – and thanks for his good work.

    I too hope people wake up. The whole mess reminds me (not sure why) of the difference between Rhode Island and Massachusetts so very long ago. Where the founders of MA threw out/persecuted/even hung people of other faiths, RI made room for people of differing views. We seem to be in a long struggle between those who believe comprise is a necessary-even vital-part of maintaining a diverse, flexible society with room for differing views and those who have “my way” and “highway” as part of every conversation.

    Completely different subject. I am watching with great interest Ackman’s shorting of Herbalife. I served as an expert witness in what at the time was the largest pyramid scheme ever prosecuted by the SEC. Much of what the media reports about multilevel marketing and pyramid schemes is at best superficial. If Ackman is right and he can get the data the impact on all public and private multilevel marketing companies will be significant.

    All the best in 2013!!! Celebrating tonight in DC at Eatonville. If you ever want some nice southern cooking and live blues/jazz try it some time!

  9. rd says:

    BusSchDean:

    I agree. The fiscal cliff shows that it is currently not possible for Congress to even attempt to negotiate what should be a doable deal. The tax system is sufficiently complex that there is lots of room for maneouvering.

    For example: Obama could “cave” on the top marginal tax rate since 35% is fairly high and there are obamaCare taxes on top of that. However, he could still extract a lot of money from the wealthy by negotiating that the capital gains tax not go back to Bush levels but instead rise to 20% plus the Obamacare high income tax that brings it to 23.8%. Allowing dividends to also be taxed as ordinary income, similar to bond interest, would be another simple move while still retaining the lower top end marginal tax rate. Eliminating the carried interest provision is another no-brainer.

    These three moves alone would have pushed Mitt Romney’s tax rate up past 20%, closer to the percentage tax burden paid by most Americans (if you assume that payroll taxes are actually a tax). However, both sides are playing this for political talking points, not actual policy. I think Obama wants to negotiate a high top end marginal tax rate on ordinary income for political theater but still retain very low rates on the income that the wealthy rely rely on so that his donor base doesn’t get really pissed at him for raising their taxes. Meanwhile, the GOP are locked into their Pledge of Allegiance to the United States of Norquist so they have not been able to negotiate at all since giving even a minor bone to Obama would have been throwing red meat to their primary challengers and their PACs.

    Meanwhile, very distorting taxes such as the AMT remain unresolved. These are distorting because they make tax planning a near impossibility for households in the 100k-200k range since Congress acting or not acting to inflation adjust it as well as the various thresholds that are crossed almost randomly year to year because of the different deduction structures means that households have no idea going into the New Year knowing what their tax burden for last year will be.

  10. Moss says:

    Disgust is a more appropriate feeling. They should give them all single shot muskets and let them settle it with a duel. Those left standing can then vote. What a complete farce.

  11. klhoughton says:

    “All of these will be phased in over the next year and decade.”

    Uh, NO. There is one exception that will do immediate damage:

    “Unemployment insurance expires for 2.1 million long-term unemployed, with another 1 million Americans scheduled to see those benefits terminate Q1 2013.”

    Of course, extending that has not been part of the discussions. Ballparking, that’s $13.32 billion* that won’t be circulating (and, since it’s unemployment compensation, the large majority of it would be circulating, as opposed to that 4.6% marginal that would just stay “invested” in the dog track anyway).

    If I’m moving my decimal places correctly, that’s just under 0.1% of the $15 trillion economy in the first quarter alone. Sooner or later–probably sooner, since the velocity of the funds is, as noted above, relatively high–you’re talking real money.

    *Ballpark=$400/week for thirteen weeks for 2.1MM and 6 weeks on average for the other 1MM.

    ~~~

    BR: Good point — I’ll fix above

  12. A says:

    Hopefully, this will help to awaken the general populace to the priorities of those in Washington: getting elected, and staying elected.

    Seems simplistic, but historically it has never been embraced.

  13. Concerned Neighbour says:

    Thank you for bringing to light the supposed temporary nature of the Bush tax cuts. Not renewing them shouldn’t be seen as a tax increase. Rather, renewing should be seen as a tax cut.

    On another note, look at those futures erase their losses yet again. It wouldn’t surprise me if a few quadrillionaires have been made over the last few years simply by trading the seemingly inevitably daily pre-market pump in the futures, along with the also seemingly inevitable last hour pump in the market. When these phenomena cease is anyone’s guess, but I expect to see them as long as the central banks continue to exert such blatant control of the markets.

  14. ilsm says:

    600B/7800B from the war machine is a tiny cut compared to the 100% increase it enjoyed under Bush/Obama.

    War spending remains near cold war peaks after the sequester cuts to the militarists’ jobs programs.

    Sequestration is a nit from the 40% of outlays that are discretionary (opposing entitlements).

  15. Matt says:

    You are incorrect regarding the AMT patch. That would affect the 2013 tax return. And the effect on middle class taxpayers could be fairly large and totally unexpected to most:

    http://articles.marketwatch.com/2012-12-27/commentary/36020175_1_fiscal-cliff-tax-implications-h-r-block

    I did the math for my own tax return and I would owe $5,000 extra…very painful.

  16. I’m not sure Dvorak is correct — I spoke to several accountants, and 2 of 3 said it is not retroactive to 2012 (the rule expiring at midnight tonite covered the prior year), while the 3rd was unsure. I will continue to research this.

    UPDATE: Yes, it looks like Dvorak is correct. ahh, I see the issue — Congress never completed the patch LAST YEAR for 2012. So this is a 2011 issue still hanging around!

  17. PeterR says:

    Futures steady.

    A bottom at SPX 1400 and AAPL 500 — EMA(409)?

    Happy New Year!

  18. Matt says:

    In addition to AMT…both SGR (aka the “doc fix”), which is not part of the “fiscal cliff” as well as the sequesters that affect health care spending, while small in terms of % of the economy, could be punitive to the health care sector, especially providers that treat medicare patients.

    I work in the health care sector, and we have had to do…dramatic…scenario planning around the Budget Control Act and SGR.

    I really think you are underestimating the disruption that the fiscal cliff could cause to certain sectors of the economy.

    As a sidenote it is difficult to rationalize why laws like SGR and the AMT exist and require last minute patches every year to avoid causing severe disruptions.

  19. jb in columbia says:

    As has been noted above, the AMT patch, or lack thereof, will hit upwards of 100 million *2012* returns. Moreover, unless it is patched, the IRS will have to reprogram their computers, causing a delay in getting out refunds. So the AMT will provide a very nice two-fold anti-stimulant in April.

    Also, the Medicare Doc Fix, while not strictly speaking an anti-stimulant, will hit patients on Jan. 1. Already, doctors are warning their patients that they will be dropping Medicare if it is not fixed.

  20. mms says:

    Moss, your solution creates one of the best comic relief visuals we could ask for! Is there a way to forward that to some of the network news programs??

  21. ThatsNotAll says:

    I agree with you BR.

    I believe leadership of both parties wants to go cliff jumping, they just want to make sure the other side gets the political blame.

  22. lburgler says:

    Barry– do you really think expiration of unemployment insurance and payroll tax holiday will not be a big deal? I guess working people can find a way not to spend a couple thousand bucks… But, being from Latin America, I have come to the conclusion that the main difference between the relatively safe and flourishing existence we enjoy is PRIMARILY afforded by the fact that we do not allow large numbers of people to slip into abject poverty. Abortion and jailing rates I think are the next big contributors. The medieval church has its nasty talons much more firmly anchored in Latin Americans.

    I plan to make a home for myself in New York City, though, and I AM concerned about what will happen if all of the longterm unemployed people in this city are suddenly left with nothing. And Long Island is only a short ways away…

  23. moosecrackers says:

    What could possibly be the problem with fixing the AMT and Medi doc rates for good?

  24. Centurion 9.41 says:

    “they hardly amount to the world ending depression many are claiming”

    Really, “many” are claiming this? Where? I follow Bloomberg, WSJ, FT, etc. and havent seen it.

    Regardless, the simple fact is, backout all the debt based safety net programs and bailouts enacted over the past 4 years and all the images of the Great Depression would be before the world in living color.

    To claim, imply or infer there’s no Depression is like saying someone isnt bankrupt because the bank keeps increasing their credit card limit….

  25. Rightline says:

    I hope our hardworking Congress enjoyed the 8:20pm start Redskins game last night while they should have been conducting business for us. Strange how the Senate suspended business at 6pm and is getting a late start at 11am today….

  26. romerjt says:

    I’m old enough to be granted the courtesy of repeating myself but I love the irony that the consequences of no deal outlined by BR sound more like a solution than a problem.

    And then there’s this . . . the Rep idea that they couldn’t vote for a deal that would raise taxes so they have to wait until taxes are raised and then they can vote for a deal that lowers taxes. You see, they too know their base are “low information voters” (maybe my favorite phrase of 2012).

    After tomorrow will people stop using the (I can’t even write it) phrase . . . geeeze I hope so.

  27. formerlawyer says:

    Don’t forget the “dairy cliff” with the potential to double the cost of milk although it appears the feckless Congress will pass a “compromise” on the backs of SNAP participants and the other 47%.
    http://www.huffingtonpost.com/2012/12/30/milk-prices_n_2385074.html

  28. number2son says:

    Anyone else remember receiving your Bush tax rebate check lo these many years ago? What a stupid and irresponsible thing that was, compounded in its fiscal recklessness by simultaneously pursuing wars of discretion. When are we, as a nation, going to pay the bill for those mistakes?

    And agree that it’s beyond frustrating to hear so many “leaders” characterize the long-overdue expiration of those wrongheaded Bush tax cuts as tax increases.

    A responsible and mature leadership would have extricated extending unemployment benefits from this thing and had it done long ago. They also would be working on separate stimulus measures. Restoring taxes for ALL is the right thing to do.

  29. changja says:

    While I agree the fiscal cliff is heavily overblown in the media, I think you’re also underestimating the impact. The AMT, Payroll reduction tax, Unemployment, and Medicare all goes into effect immediately. Those will be unlikely to cause a depression but a recession is still possible due to economic momentum. Didn’t the CBO or Tax policy center project that a recession could happen if no deal is made?

    A possible recession is something to be concerned about in my opinion.

  30. wally says:

    “Those of you who are anti-Keynes should therefore be rooting for this.”

    There’s the real irony… people are arguing based on brand name and on whom they are ‘against’ and ignoring the facts of the situation. It is the pettiest fight imaginable.
    The whole idea of brand loyalty to your party regardless of what crap they are selling today seems to be a habit of small intellects.

  31. Petey Wheatstraw says:

    wally:

    Yup. The pea-brains are ascendant.

  32. Disinfectant says:

    Yeah, it’s kind of odd how all of the Republicans said that the Obama stimulus plan in 2009 (tax cuts + increased spending) HURT the economy or, at best, did nothing at all. Yet we have an anti-stimulus plan for 2013 (tax increases + spending cuts) and the Republicans say that this, too, will HURT the economy. Isn’t it obvious that there is ZERO consideration of actual economics going on here? It is 100% political b.s.

  33. Pantmaker says:

    You are spot on with the facts Barry. I say we climb into the collective barrel and go over the falls. Frankly I’m surprised more people aren’t on board with this view. All of this negotiating and posturing is can-kicking. Let’s get our nation’s house in order now. We can tweak our tax rates and spending levels later when we have the luxury of firmer footing. There is simply no way this is going to be painless.

  34. DeDude says:

    Going over the cliff will have a number of bad effects on the economy and even though current GDP growth is about 3% it may even drag us down to negative growth for a few quarters. But the deals I am hearing about have much more negative effects in the long term. We all know that the Bush tax cuts for any income above 100K should run out and that the sequester spending cuts to the military are essential for getting the war machine reduced. But none of those will ever happen in an active process where a majority have to vote for it – those essential changes to government income and spending will only happen if they are the default and there is no agreement to prevent them from happening.

    I hear that treasury is in the process of designing a new trillion dollar platinum coin with Obama’s face on one side and a bare ass on the other side. Next time congress refuse to raise the debt sealing Obama will invite the GOP leadership to the White House, hold the coin up so he can look at his own smiling face and tell them: “if you refuse to pay for the spending you have authorized by increasing taxes or the national debt, you leave me no other choice than to deposit this coin with the Fed”. One of the commenters on Krugman’s blog has been talking a lot about this coin, but this is the first time I have heard about its design.

    @moosecrackers;

    The problem of fixing the AMT and Medi doc rates for good is the effects that will have on the numbers being feed to the sheeple. When you see official projections of how big the debt and deficits will be (years into the future), or how many years before Medicare/Medicaid runs out of money; those numbers are based on “current law”. Although everybody knows those fixes will be done every year, the projections look much better because they are based on pretending that they will not. If they did a permanent fix then all the projections would have to be based on reality and things would look much worse.

  35. [...] Blog Entries4 The ever logical Barry puts it best. So Simple Even A Congressman Could Understand It… | The Big Picture [...]

  36. bear_in_mind says:

    As some of duly noted, the Congress has FAILED to pass a budget for 1.5 to 2 years, therefore the impact of the so-called Cliff is hard to predict. Regardless, this won’t be the end of the world as we know it.

    What will really be interesting to see is if the Red State debt chicken-hawks vote for their “principles” and against the interests of their constituents…

  37. DeDude says:

    Another rumor about the “sealing buster coin” is that Obama will tell them: “you can kiss one side of this coin or the other side of this coin but the fact is that whether you like it or not, you will have to kiss this coin”.

  38. Adding in last week’s economic data, TRI continues to project positive GDP in Q1 & Q2. There is no sign consumers or firms are mitigating fears of the fiscal cliff…

    TRI’s GDP outlook chart: http://trendlines.ca/free/economics/RecessionIndicatorUSA/USA-TRI.htm

  39. rd says:

    It looks like the Senate has negotiated a reasonable compromise and has voted overwhelmingly to approve it. Even Grover Norquist is accepting it.

    However, as usual the Republicans in the House appear to believe they can get a deal more to their liking.