Wednesday, November 14, 2012

Unless Congress passes budget deal, we're all set to head over the cliff

Unless Congress passes a budget deal by January 2013 (they haven't passed one in over three years), we will all be going over the "fiscal cliff" in one way or another. While some people think it's only the "wealthy" who'll be affected, think again. The package of tax increases and spending cuts set to go into effect on January 1 will hit the economy so hard that economists say we'll sink into another recession in the first half of 2013 - and nobody will escape it.

Though President Obama insists he only wants the Bush tax rates to expire for the top earners, according to the nonpartisan Tax Policy Center, middle income families would have to pay an average of about $2,000 more next year. And the nonpartisan Congressional Budget Office estimates that up to 3.4 million jobs would be lost, the unemployment rate would hit 9.1 percent from the current 7.9 percent and stocks could plunge. Overall, the CBO estimates the total cost of the cliff in 2013 could be about $671 billion.

What's more, the tax increases on Americans would be the most massive in 60 years when measured as a percentage of the economy. "There would be a huge shock effect to the U.S. economy," says Mark Vitner, an economist at Wells Fargo.Most of the damage would come from the tax increases, but the propsed spending cuts -on defense, Medicare, etc., would have negative consequences as well in the form of layoffs and the like.

Congress could strike a temporary deal to delay the cliff, but this uncertainty itself is could cause many companies to further delay hiring and spend less. Already, many U.S. companies say anxiety about the fiscal cliff has led them to put off plans to expand or hire.

As usual, Obama said he would veto any bill that would extend tax cuts on income above $250,000 despite the warning from Republican House Speaker John Boehner that higher tax rates on upper-income Americans - many of whom provide jobs - would slow job growth. After all, you can't help job seekers by punishing job creators.

More than 50 percent of the tax increases would come from the expiration of tax cuts approved in 2001 and 2003 and from additional tax cuts in a 2009 economic stimulus law. The first set of tax cuts that are now set to expire reduced rates on income, investment gains, dividends and estates. They also boosted tax credits for families with children. Deductions for married couples also rose. The 2009 measure increased tax credits for low-income earners and college students as well. All are set to expire.

Another 20 percent of the tax increases would come from the expiration of a Social Security tax cut enacted in 2010. This change would cost someone making $50,000 about $1,000 a year, or nearly $20 a week, and a household with two high-paid workers up to $4,500, or nearly $87 a week.

"Every worker in America is going to see a reduction in their paycheck in the first pay period of 2013," Vitner noted.

According to an Associated Press report, "an additional 20 percent of the tax increase would come from the end of about 80 tax breaks, mostly for businesses. One is a tax credit for research and development. Another lets companies deduct from their income half the cost of large equipment or machinery."

Mark Bakko, a Minneapolis accountant, says many mid-size companies he advises are "holding off on equipment purchases or hiring until the fate of those tax breaks becomes clear." Bakko noted that the research and development credit typically lets a company that hired an engineer at a $100,000 salary cut its tax bill by $10,000. The credit has been routinely extended since the 1980s.

The AP notes that "the rest of the tax increase would come mainly from the alternative minimum tax, or AMT. It would hit 30 million Americans, up from 4 million now.The costly AMT was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But the AMT wasn't indexed for inflation, so it's increasingly threatened middle-income taxpayers. Congress has acted each year to prevent the AMT from hitting many more people."

Under the new tax plans, households in the lowest 20 percent of earners would pay an average of $412 more, the Tax Policy Center calculates. The top 20 percent would pay an average $14,000 more, the top 1 percent $121,000 more.

All this would lead many consumers to spend less, which could likely cause businesses to cut jobs. Others would delay hiring.

Another part of the package includes cutting defense spending by10 percent. Defense Secretary Leon Panetta has said those cuts would cause temporary job losses among civilian Pentagon employees and major defense contractors. Lockheed Martin has already announced over 100,000 layoffs, and many other contractors are doing the same. Spending on weapons programs would also be cut - how this affects national security has not been addressed.

Spending on domestic programs, like highway funding, aid to state and local governments and health research, education grants to states and localities; the FBI and other law enforcement; environmental protection and air traffic controllers would also be cut. Meanwhile, hospitals and doctors' offices facing $11 billion in Medicare payment cuts could be forced to cut jobs due to the lost reimbursement.

Finally, extended unemployment benefits for about two million people would end, which currently provide up to 73 weeks of aid.

Obama promised that if given four more years, he would finish what he started. If he and Congress don't get their act together, he's well on his way to finishing the demise of this country he started four years ago.

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  1. Julie,
    I’d like to think that the Republican-led House will stand up to this worn out class warfare routine used by the present administration, but I will not be holding my breath on that one. I hate to be skeptical but Houser Speaker Boehner has demonstrated by past performance that he does not have the spine, stomach, or political will for it. And with the media we already know how they are going to vilify the opposition to Obama their supreme leader. What amazes me is how so many people have embraced this class warfare for the last four years and are apparently more than willing to continue with it for the near future. To me this comes down to pure envy and greed against people who are successful. Shouldn’t we applaud those who achieved such success by their own hard work? You also correctly identify the Bush tax rates as tax rates rather than the Bush tax cuts terminology that is so often spouted by the party of envy. They make it sound like tax payers were given these rates as a temporary gift and we now need to pay up. They forget that these tax rates that benefit everyone have been the norm since 2001 and 2003. Well, I think the train of fiscal irresponsibility has left the station so to speak and the destination is not going to be pretty. I fear that America will not wake up until our economic system collapses and then it will be too late. Some won’t even wake up at that point. Some may even embrace it. I am hoping for the best but unfortunately expecting the worse.

    1. I couldn't have said it better, Ed B. I hope people will realize what it is they're "wishing" for before they get it and realize they don't want it after all. Thanks for another fantastic post. I wish you a Happy and Blessed Thanksgiving! Thanks for all your support - it helps more than you know! Have a wonderful day.

  2. Noting that cuts in government spending will cause a job loss requires acknowledging Keynesian economics as having validity, yes?