The Fiscal Cliff Compromise:
What are the key provisions?
Who won? Who lost?
Key Provisions of the Compromise
- Cancels large tax increases on middle income earners; extends Bush-era tax cuts for individuals earning up to $400,000
- Delays severe government spending cuts (Sequestration)
- Renews unemployment benefits that were to expire
- Creates $600 billion in new tax revenue by raising the tax rate on those earning more than $400,000 ($450,000 for families) to 39.6% from 35% (only on the marginal increase, not on their 1st $400K)
- Employees portion of Social Security payroll tax not extended, reverts to 6.2% (from 4.2%). This represents a tax increase for most, especially lower income earners by wiping out the gain from the extension of the Bush tax cuts.
- Personal exemptions and itemized deductions reinstated at higher threshold of family incomes above $300,000; eliminates pre-2010 phase out
- A 20% rate applies to capital gains/dividends, but only for those in the top bracket. Rest remains at 15%
- AMT—permanent extension of the “Patch”
- Estate and gift tax exclusion retained at $5 million
- About 50 special interest provisions, including for film makers, Alaska natives, railroad maintenance credit, etc. Many medical care related.
- Permits debt to rise $4 trillion (compared to what would have happened if we went over the “cliff”). New revenue in 2013 amounts to a paltry 0.4%of GDP.
What the Compromise Accomplished
- Likely will prevent the country from going back into recession (at least for now)
- Renews unemployment benefits
- Cancels massive tax increases on the middle class
- Sequestration-demanded spending cuts put off at least two months
What the compromise failed to do
- Does nothing to reign in soaring government debt.
- Absolutely NO significant spending restraints. Nothing about entitlement programs, particularly Medicare/health care costs.
- No tax simplification; zero tax reform.
- Fails to raise revenues beyond token amounts. President Obama originally sought $1.6 trillion over 10 years; Boehner offered $800 billion. So they compromised…..on only $620 billion!
- Does nothing to address current high levels of unemployment.
- America’s long-term finances are in severe jeopardy, more so after this token compromise…..real crunch will come in less than two months when the debt ceiling mandate will hit again…..In many ways the threat of national “default” in less than 60 days is even a more serious threat than the “cliff”.
- With no real deficit reduction, the debt to GNP ratio will worsen. Today our debt stands at an unhealthy 73% of GDP. That’s actually the good news—in the near term we will be at Greece-levels of 100% and by 2030, if nothing is done, the debt will probably be at an unsustainable 200% of GDP!
- Much of the future federal budget will be overwhelmed by health care costs.
The Next Crisis Cometh: In Less Than Two Months
- Next up is the debt ceiling, which technically we reached on Dec 31. Through some deft accounting measures, Treasury managed to postpone the debt ceiling crisis until late February. The Sequester—the automatic spending cuts—which were delayed, will also come due at the same time!
- Governing by deadline and uncertainty, one observer noted, is a bad way of doing business, but that’s the reality. The continuing uncertainty will be a drag on the economy. Just “on to the next Cliff”.
- If Congress does not increase the “debt ceiling”, the government will be unable to pay the nation’s bills and pay interest on the outstanding debt. Any failure by the government to make these payments could be seen as a “default”. The nation would certainly then be pushed into recession.
So Who Won, Who Lost?
- President Obama: Lost overall, despite short term gains. He won a tax increase on the wealthy and can claim that the system is now “more progressive”. He gave up no spending cuts, particularly in the entitlement programs so important to his base……Wanted tax increases at least double what he got; couldn’t get the debt ceiling off the table; no new stimulus measures….His achievements fell far short of his stated goals…More importantly, he abandoned any attempt to achieve a “grand compromise” that would place the economy on a more stable footing….Had virtually no vision or strategic plan to defend before the American people
- Congressional Republicans: Probably won more in the compromise than they might have expected at the outset—making the Bush tax cuts permanent for 98% of Americans, permanent breaks on the estate tax and dividends. Overall, major loser, as the perception of American public of House Republicans diminished; indeed, the House GOP caucus appears to be permanently fractured. Hue and cry for “spending cuts”, without substantive proposals where specifically to cut.
- Senate leadership. Fell into line and passed compromise, but Harry Reid and Democrat leadership offered no plan. Reid marginalized as Biden-McConnell relationship became key to securing needed votes.
- Well-off senior citizens no longer working. Won big!! Hey, no cuts to Medicare, Social Security or Defense. Unless you are very wealthy, no tax increases, and unless you are still working, no additional levies. Debt continues to rise, but what the hell, we’ll be dead before it impacts. Just keep that train a running, folks!
- Our grandchildren: Major losers. They may not realize it but we have succeeded in foisting an enormous debt on future generations. The young continue to subsidize the rest of us—on Social Security, Medicare, Medicaid, government or other pensions/health care. Of course it is all unsustainable—just wondering when they will figure that out.
—Tyrus W. Cobb
January 11, 2013