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Fiscal Cliff I: The Search for More Money

As Thrill noted, the so-called fiscal cliff was semi-averted last night. I didn’t pay too close attention to the debate since the basics of the deal had been hashed out days before. All we had last night was political theater. It’s true that 2/3 of the Republican House voted against it. But they allowed it to come to a vote and most voted after they were sure it would pass as an ass-covering maneuver. I’m reminded — and not in a good way — of the TARP vote where the Republicans and Democrats agreed to let vulnerable House members vote against it once they’d secured passage.

To be honest, I’m OK with the deal, since the alternative was letting all the tax cuts expire. I would have preferred it be paired with entitlement reform but the Republicans apparently scuttled that, to judge by the GOP Senate leadership’s statements over the last few days. It will mean about $60 billion per year in revenue — a few drops in the bucket that only looks large in comparison to the trivial budget maneuvers we’ve gotten until now.

What no one is mentioning, of course, is that there is a much larger tax increase going into effect: the expiration of the payroll tax holiday, which is expected to add about $100 billion to federal revenue. That means every working person is going to see a 2% slice taken out of their next paycheck. I’ve long been in favor of this, feeling that the longer the holiday went on, the more difficult it would be too get rid of and the worse it would make the situation with Social Security/Medicare. I also thought it was wrong-headed from the beginning. From the employer side, it would have made hiring cheaper and eased unemployment. From the employee side, all it did was (maybe) goose consumption. And it did even more to narrow the wedge of people actually paying taxes in this country. The cut was temporary and it’s gone now. But it will be fun to watch the shocked reactions of people who think taxes are just going up on “the rich”.

The big thing — and the reason my reaction is kind of “meh” — is that two more important cliffs were put off. One is the sequester, which seems to have bipartisan opposition. Republicans don’t want military spending cut, despite spending currently being in excess of Vietnam War levels (although the number of soldiers is only slightly above post-Cold-War levels). And Democrats don’t want anything cut.

Obama has indicated that future spending cuts will have to be matched by tax increases, but I think he’s overplaying his hand here. The Republicans were forced to give in on taxes because the alternative was tax hikes for everyone. Obama is going to have to give in on spending cuts because the alternative is a 8-10% cut in everything else.

He’s also going to have to give in because of the third cliff: the debt ceiling. This could be the most interesting fight as Obama might try to fight this on legal/constitutional grounds. I’m not looking forward to this as it was almost an economic castastrophe last time. Hopefully, our leadership won’t be quite as stupid (yes, I know ….).

In the end, I think the most important thing to be pulled out of this unholy mess is the chained-CPI formulation of Social Security that was temporarily on the table and should be again. This seemingly small change would slow the growth of the program and save us trillions down the road. If we can get that, it will have a more lasting impact than the tax hikes, debt ceiling or sequester.

This isn’t over yet. We’ve got another two months of theater to go.

3 comments

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  1. Section8 says:

    I would have preferred it be paired with entitlement reform but the Republicans apparently scuttled that, to judge by the GOP Senate leadership’s statements over the last few days.

    No they didn’t. They just knew in order to actually get this accomplished they would have had to play real chicken and let the increases kick in and wait for the cuts to kick in, but then they would have been accused by the same people blaming them for caving, that they were reckless in negotiations. Yeah I wasn’t happy with Rubio’s comments, but I’m guessing if Rubio said we’re fighting this and until the cuts are set in stone we aren’t budging on taxes, well you’d be posting about how the GOP is fine with dropping our credit rating, and stuck in no tax mode mentality and not looking at the “big picture”.

    It will mean about $60 billion per year in revenue — a few drops in the bucket that only looks large in comparison to the trivial budget maneuvers we’ve gotten until now.

    Really? I was told by this administration that a small tax on the rich was going to solve everything. We’d even have enough left over to send Johnny to college, and build some bridges. I guess that was all just horseshit? No way!

    The Republicans were forced to give in on taxes because the alternative was tax hikes for everyone.

    I thought it was because the GOP scuttled it.

    Obama is going to have to give in on spending cuts because the alternative is a 8-10% cut in everything else.

    Um nothing will be cut, it will all be shuffled and re-categorized to appear as a cut and nothing more. Maybe a little on defense. The card the GOP had has been spent. Taxes for real cuts: Gone. They caved because history has shown they won’t get backing from the fair weather libertarian populace out there. Now it will be grandma will starve if we cut anything, and after some noise everything will stay as is. We’ll save a trillion here by factoring in the savings from the wars that would end whether we had this fiscal cliff or not, maybe some playing around with projected interests rates to save on some other items, or a scheduled 5% increase in a program will be inflated to 10% so that when it’s adjusted down to 6% it’s a cut. Smoke and mirrors, just like it always is.

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  2. Hal_10000 says:

    The thing that keep jumping out at me is the liberal are whining because Obama raised the tax hike threshold to $450k instead of $250k. This really shows that the tax hikes aren’t really about the deficit. The difference between those two figures is $20 billion per year. The difference between that and letting all the Bush tax cuts expire is $400 billion per year (modulo recession). If they were REALLY deficit hawks, they’d have pushed for all the tax cuts to expire of be phased out.

    They don’t want to pay the piper either. They just want to get the rich.

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  3. Nexus says:

    My wife makes $36K a year as a department supervisor in a bank. She gets her first check of the year today and the take home is $30 less than it was last year, all due to taxes. Make no mistake, the end of the SS tax cut and new ObamaCare taxes will impact everyone.

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