Daisy opened the Fiscal Cliff can this morning, but I wanted to offer my own insights.
The whole thing can, in its essence, be boiled down to one thing: Washington politicians have the foresight of a High School senior class the week after Spring Break. They just look at you with that blank stare like, “Yeah, that’s cute that you want us to do something, but no.”
To be more precise, the Fiscal Cliff is the confluence of a few events.
The 2011 Budget Debt Ceiling Crisis: You remember this little gem written by the Chicks. In there, I channeled my inner Nostragenius and penned:
Raise the debt limit. GOP should allow for some targeted tax increases (so they can point out later how much it F-ed up the industries concerned) while the Dems should suck it up and cut spending on entitlements.
But I digress. The point is, during this
hissy-fit by children scholarly statesman-like debate, Congress and the President agreed that they’d raise the big fat debt ceiling for now, but put in place some really intense budget tactics with real teeth so they’d have to buckle down and finally do their homework before the end of 2012. These tactics included 1) The Budget Control Act of 2011. Yes, that was last year. Yes, we’re acting like a plan we passed last year for this year would never come to fruition. But come on!? That was back when we were Juniors! And 2) set to expire on January 1 are what we commonly refer to as the Bush Tax Cuts, although they are properly named The 2010 Tax Relief Act. That means they were extended and signed by the President AFTER Bush was President!?
So, here we are, final exams are upon us and the Senior Class of Capitol Hill High is on its way out the door with only a few nights to study for that killer Macroecon final, but they’re far more interested in spending Dead Week at a bonfire down by the beach where there’s a raging kegger going on. As to the two parts and where we are on them:
The 2010 Tax Relief Act: This is the stuff you hear about. This is the President’s focus. He wants “millionaires and billionaires to pay their fair share”. (DRINK! Sorry, with school out, we’ve been playing a little game around the house that involves drinking when you hear this phrase. I’m scheduled for a liver transplant next week.) In bullet points, this is what we’re talking about:
- Extending the Income Tax Rates established in 2001 and 2003.
- Extending the Capital Gains and Dividends tax rates established in 2001 and 2003
- An increase in eligibility for the Alternative Minimum Tax.
- A 13 Month Extension of Federal Unemployment Benefits (yes a year and a month).
- A reduction of FICA Payroll Taxes from 6.2% to 4.2%.
- Extending the Child Tax Credit to more people.
- A decrease in deductibility of depreciation allowances for small businesses.
- Several other targeted tax credits.
The focus here is on the first two bullets. Most of the rest, if the President gets his way, would be extended even further. On the subject of the tax rates, at this point the leading edge for increasing the tax rate is somewhere in the ballpark of $400,000 to $500,000 of annual income for individuals. This would push tax rates up by as much as 4.5% for folks at or above that income level. We’ve all done the math and based on this clip, this isn’t enough to make a dent in the debt and barely enough to scratch the deficit. But the President ran for re-election on this and he’s dead set on it. And heck, he’s basically said that it’s more about being fair and making sure that “millionaires and billionaires pay their fair share” (DRINK!). It’s his prerogative to follow through on this and you can’t hold it against him. I just don’t think it’ll make the impact he expects.
The Budget Control Act of 2011: This was the piece that really got us the debt ceiling agreement. By the way, we’re about a month away from reaching the new debt ceiling. But we probably don’t have a spending problem as much as we have a problem with making sure that “millionaires and billionaires pay their fair share” (DRINK!). Anyway, here’s what the BCA of 2011 brought us:
- The President got his debt ceiling increase with some caveats that offer Congress some window-dressing opportunities to squeal about how stupid it is, but no real ability to stop it.
- Spending was to be reduced by more than the increase in the debt limit.
- The creation of the “Super Committee” to design a budget plan to cut $1.5 Trillion from the debt over 10 years. That’s $150 Billion a year. They failed to propose anything that Congress and the President would pass. Blame whoever you want, they all deserve it.
- And the capper, automatic cuts across the board which would, paired with any actual deficit reduction accomplished by Congress, add up to $1.2 Trillion from 2013 to 2021. Yes, less than 10% of the debt in 8 years. At that rate, we could eliminate the debt in… well, more than 80 years… Some exemptions to the cuts include Medicaid, Social Security, military and civil government employees, veterans’ benefits, and a limited reduction in Medicare.
The last two bullets are the critical ones here. The inability of the bi-partisan Super Committee to come up with anything that the two parties could agree on is a clear indicator that the folks in Washington are far more interested in their own lifeblood (re-election) than they are in making any kind of dent in our debt or responsibly handling the business of the people they represent. And so, we’re left with the automatic cuts.
Now, what are we supposed to do from here? I’m sort of torn, really, and I see it a few ways.
- We get a real deal that actually settles all this crap and we really start reducing the deficit. Holy sh*t, I can’t even believe my computer let me type that. This will NEVER happen.
- We get a temporary deal that looks a lot like the Budget Control Act of 2011 and we kick the can a little farther down the road. This will mean that the debt grows slower, hopefully, and that we get closer to a place where “millionaires and billionaires pay their fair share” (DRINK!). This seems like the most likely solution, to me. Because, after all, why not let next year’s Senior class deal with this!?
- We go over the cliff. What does this mean? Well, go look at the stuff above. It all goes away. As Daisy’s post states, taxes for everyone go up a little and a lot for some. Spending gets slashed. We almost certainly see a bad recession, but that might happen with #2 anyway. The up side of this is, we’ll actually see some positive movement on the debt. And what’ll be funny, I think, is that tax revenues won’t rise that much. You see, people will start to insulate themselves from rising taxes by doing things that successful people do. I’m just speculating there. I could be wrong, but there’s NO way the tax changes generate the additional revenue that’s be forecasted. They never do.
- This is my favorite, but it’ll never happen. The GOP rolls over and offers the Democrats everything. Candy for dinner! Every kid dreams of it. Hell, when we were first married, my wife and I ate out at a really nice place and got our dessert first! It was awesome! We took our entire meal home and it wasn’t nearly as good reheated the next day. My hope is if this happens, people will see that the Democrats really don’t have a solution that’s workable. All they really have is demagoguery. They have a slogan “millionaires and billionaires pay their fair share” (DRINK!) that sounds good to people who want free stuff and makes me hope there’s a nun with a liver I can borrow. But this would force the left to own the new reality they created with their social justice engineering. Of course, they won’t claim it, but it’d be fun to watch them wiggle.
So, you see, these guys designed a mechanism to force themselves to do their homework. Mind you, not enough homework to make an A or anything, but enough to make sure they keep their low B and get into Community College (not that this isn’t a noble endeavor!) and now they just can’t seem to get the work done. But hey, a bunch of them are leaving in a week or so since they lost their elections or are retiring and some of them will get re-elected next time no matter what happens. And no worries, I heard Harry and Mitch are doing Keg Stands down by the pier, so it’s all good. I just hope nobody tags me in their Facebook albums. Where’s the funnel?