Economy / Fiscal policy / U.S. Domestic Policy

The Fiscal Cliff: More of the Same


An American Action Network Graphic

The “Fiscal Cliff” seems to the be the buzz-word of the month.  Why shouldn’t it be? The numbers are scary.  An almost 600 billion dollar combination of tax increases and across the board spending cuts that go into effect on January 2, 2013. Broken down the majority of the cost comes from 440 billion dollars in tax increases and 108 billion dollars in spending cuts, which, no surprise, will most likely result in an economic recession.

A study from The American Action Forum estimates that going over the Fiscal Cliff could result in the loss of as many as 10 million jobs, 6 percentage points of GDP drop, and a 2 point unemployment increase.  And we thought the unemployment numbers were bad now.

But what is the cause of this economic crash? One would think that by cutting the deficit, the economy would turn around for the better. Unfortunately, that kind of rationale doesn’t apply here.

Taken from a report by The Committee for a Responsible Federal Budget, the default changes are as follows:

  • The expiration of the 2001/2003/2010 Tax Cuts, also known as the Bush Tax Cuts.  The top tax rate would rise from 35% to 39.6% along with other rates increasing, the Estate tax returning to the 2001 parameters of a 1 million dollar exemption and 55% top rate, and the Child Tax Credit cut in half.
  • End the extension of 2% payroll tax holiday and extended unemployment benefits, resulting in payroll taxes rising from 4.2% to 6.2% and the reduction of the number of weeks Americans can collect unemployment insurance.
  • Activation of the Sequester.  This means a 1.2 trillion dollar across the board cut over a ten year time span.  Defense spending will be cut across the board by 10%, non-defense discretionary spending cut by 8%, and the reduction of Medicare provider payments by 2%.
  • The implementation of the Affordable Care Act taxes, including a .9% increase in hospital insurance payroll tax on higher earners, and a 3.8% tax increase on investment income.

Chairman of the US Federal Reserve, Ben Bernanke, stated, “It is important to achieve sustainability over a longer period…one day is a pretty short time frame”.  The Chairman has it right here. Drastic cuts across the board along with dramatic tax increases will only cripple the economy further, stunting growth and killing jobs.

But the alternative, extending the Bush Tax cuts and preventing spending cuts, which is the method Congress has used to deal with this fiscal catastrophe before, will only increase the deficit and prolong the problem.

Congress’ “kick the can” mentality has to end.  The CRFB estimates that continuing these policies could increase the debt in 2022 by 7.5 trillion, meaning the debt would increase from 70% of GDP to 88% by 2022.

That is not to say that solutions to this economic conundrum have not been attempted.  In 2010 President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform to address the fiscal dilemma.  They created a draft proposal, also known as the Simpson-Bowles report, which failed to pass in the committee.  In 2011 Congress attempted again to use some of the Simpson-Bowles plan to address the fiscal threat and the infamous debt ceiling debacle, but again it failed to pass Congress.

So what’s next?  It is most likely that Congress will not allow the United States to plunge headfirst over the fiscal cliff, but the fact that they have yet to agree on a bipartisan solution is alarming.  There is no motivation within this lame-duck session to make waves, since our leaders are more concerned with winning re-election.  AAF recently published a scorecard showcasing their lack of initiative.

While our representatives are biding their time, the American people can expect only one thing, more of the same.