Forward Off The Fiscal Cliff…Falling…Falling…Splat!–Videos
Thelma & Louise:Ending Scene
Fastest with the Mostest
Where Have all the Flowers Gone: Eve of Destruction
Pete Seeger: Where Have All the Flowers Gone?
The fiscal cliff: Another phony emergency to give the government more power
U.S Fiscal Cliff, What Could Happen?
John Boehner on Fiscal Cliff: ‘White House Has to Get Serious’
Democratic Leaders: GOP Has Yet To Make Serious Offer As Fiscal Cliff Looms
Obama Takes Fiscal Cliff Message To The Public
Fiscal Cliff: Raising Taxes on Middle-Income Americans
Fiscal Cliff: Why Reducing Spending is Our Only Hope
Fiscal Cliff Debate: Austerity One Way or Austerity Another Way
Fiscal Cliff An Artificial Crisis
Robbing the Future with Budget Deficits
Taxes, Debt and the Fiscal Cliff pt3
Word of the Day: Fiscal Cliff!
Explaining the ‘fiscal cliff’
Forward off the fiscal cliff: falling, falling, splat!
Time is quickly running out for President Barack Obama and the congressional leadership of the Democratic and Republican parties as they attempt to negotiate a deal that would avert going over the year-end “fiscal cliff.”
If a deal or fiscal cliff fix is not agreed to by then, the so-called Bush marginal tax rate cuts would expire on Jan. 1, 2013 followed by the cutting or sequestration of government spending on Jan. 15.
Should these massive tax hikes and huge spending cuts happen, the Congressional Budget Office (CBO) has projected that the unemployment rate would rise above 9 percent in the latter half of 2013 from its present level of 7.9 percent with the economy going into another recession, with negative economic growth in real gross domestic product for the first two quarters of 2013.
In a November report titled “Economic Effects of Policies Contributing to Fiscal
Tightening in 2013,” the CBO projected that “if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by .5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013), reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year.”
The estimated 10-year cost of the expiration of the Bush 2001/2003 marginal rate tax cuts is $2.4 trillion. The estimated cost of the expiration of Alternative Minimum Tax (ATM) patches is $864 billion and of various “tax extenders” is $890 billion. Over a 10-year period, the spending cuts or sequester of 10 percent of defense spending is estimated to be $510 billion and of 8 percent of non-defense spending is estimated to be $335 billion.
A majority of Democrats and Republicans appear to agree that the Bush marginal rate tax cuts should be extended for those individuals earning less than $250,000. Both parties also agree on extending the ATM patches, tax extenders (R&D tax credit and others) and the so-called doc fix for Medicare reimbursement. Both parties appear to agree on not extending the temporary one year 2 percent reduction in the Social Security (FICA) employee payroll tax and not extending unemployment insurance benefits.
The biggest disagreements between both political parties is over Obamacare, or the Affordable Care Act, with its additional 3.8 percent tax on dividends and capital gains and a .9 percent tax on wage income for those earning more than $250,000. The Republican Party wants to repeal Obamacare in its entirety, while the Democrat Party wants Obamacare to be implemented on schedule.
Obama and the Democratic Party want to raise the marginal tax rates of those earning above $250,000 by increasing the marginal tax bracket rates from 25, 28, 33, and 35 percent to 28, 31, 36, and 39.6 percent and increasing the estate tax from 35 percent for estates over $5 million to 55 percent for estates over $1 million. The Democrats also want to increase the capital gains tax from 15 percent to 20 percent and tax dividends as ordinary income.
In a nationally televised statement to the nation on Nov. 28, Obama said, “”Our ultimate goal is to get an agreement that is fair and balanced.” “If Congress does nothing, every family in America will see their taxes automatically go up at the beginning of next year,” the president added.
The Republican Party wants the Bush marginal tax rates either made permanent or extended for at least another year and either the elimination of the estate tax or no changes in the current estate tax. Republicans also want to either eliminate the tax on capital gains and dividends taxes or leave their taxation unchanged. They argue that it is the successful small business owner who creates wealth, income and jobs.
House Speaker John Boehner said, “Raising tax rates is unacceptable.” and added “Frankly, it couldn’t even pass the House. I’m not sure it could pass the Senate.”
Boehner concluded, “The goal here is to grow the economy and control spending. You’re not going to grow the economy if you raise the top 2 percent rates. It’ll hurt small businesses and it’ll hurt our economy, why this is not the right approach.”
However, the biggest differences between both political parties in their attempt to avoid falling off the fiscal cliff concerns government spending cuts or sequestration. The real problem is not adequate tax revenues, but excessive government spending, with deficit spending under President George W. Bush of nearly $3.3 trillion over eight fiscal years (2002-2009) and Barack Obama of nearly $5.1 trillion over four fiscal years (2010-2013).
Next week part 2 of this article will address the challenge of cutting federal government spending.
Raymond Thomas Pronk is host of the Pronk Pops Show on KDUX web radio from 3-5 p.m. Fridays and author of the companion blog http://www.pronkpops.wordpress.com
TIME Explains- the Fiscal Cliff
Complete explanation of ‘fiscal cliff’
The Fiscal Cliff — Everything You Need to Know Explained
The fiscal cliff explained (with help from Hollywood)
Fiscal Cliff An Artificial Crisis
Peter Schiff Explains Why Libs Are Willing To Go Off The ‘Fiscal Cliff’
Douglas Holtz-Eakin: Going Off the Fiscal Cliff Is Irresponsible
Senator Pat Toomey on Fiscal Cliff: A Strong Recovery Is within Reach
2012 Fiscal Cliff
Fiscal Cliff: How Much Would Taxes Rise in 2013?
Donald Marron, director of the Urban-Brookings Tax Policy Center, walks viewers through the anatomy of the Fiscal Cliff, explaining exactly what as it stake for Americans in various income groups.
RON PAUL TALKING ABOUT THE FISCAL CLIFF!
Fiscal Cliff – Clock Ticking – Cavuto
MiMike Maloney on the Fiscal Cliff and the “Holy Sh*t” Demographic Bankrupting America!
Black Friday, Fiscal Cliff, Gold, Dollar
The Real Fiscal Cliff: How to Spot the Ledge | Peter Schiff
With Election Over, Washington Shifts Focus to Fiscal Cliff
Is America about to Fall off the Fiscal Cliff?
United States fiscal cliff
“…The “Fiscal Cliff” refers to the expected slow down in the U.S. economy if spending from the government goes down as much as scheduled and taxes go up as much as scheduled on January 2013. These laws include tax increases due to the expiration of the Bush tax cuts and spending cuts under the Budget Control Act of 2011. The Congressional Budget Office reported an increased risk of recession during 2013 if the deficit is reduced suddenly, while indicating that lower deficits and debt would in time improve long-term economic growth. The deficit for 2013 is projected to be reduced by roughly half. Further, over the next ten years, projected increases in the United States public debt would be lowered by as much as $7.1 trillion or about 70%, resulting in a considerably lower ratio of debt relative to the size of the economy.
The Budget Control Act of 2011 was enacted as a compromise to resolve a dispute concerning the public debt ceiling. Deficit spending previously appropriated by Congress was bringing the federal government’s total debt close to the statutory ceiling. Republicans in Congress refused to approve an increase in the ceiling unless there were deep spending cuts. The Budget Control Act included an immediate increase in the debt ceiling, along with a mechanism for facilitating two additional increases. It also provided for automatic spending cuts to begin on January 2, 2013.
The year-over-year changes for fiscal years 2012–2013 include a 19.63% increase in tax revenue and 0.25% reduction in spending. These changes would return tax revenue to approximately its historical average of 18% GDP, while continuing to spend at dollar levels held approximately the same since 2009. Some major programs, like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans’ benefits, are exempted from the spending cuts. Spending for federal agencies and cabinet departments would be reduced through broad, shallow cuts (referred to as budget sequestration).
The projected effects of these changes have led to calls both inside and outside of Congress to extend some or all of the tax cuts, and to replace the across-the-board reductions with more targeted cutbacks. It has been speculated that any change is unlikely to come until the period roughly between the 2012 federal elections and the end of the year. Additionally, the debate may be exacerbated by the expectation that the debt ceiling is expected to be reached before the end of 2012,[note 1] unless “extraordinary measures” are used. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the 2010 Tax Relief Act or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes and/or increasing spending.
The term ‘fiscal cliff’ had in the past been used to refer to various fiscal issues. The term started being used in the current context near the original expiration of the Bush tax cuts in 2010. In 2011, the term started to be used to refer to the deficit reductions that would occur in 2013 under current law.
In late February 2012, Ben Bernanke, chairman of the U.S. Federal Reserve, popularized the term “fiscal cliff” for this crisis. Before the House Financial Services Committee he described that “a massive fiscal cliff of large spending cuts and tax increases” would take place on January 1, 2013.
Some analysts have argued that “fiscal slope” or “fiscal hill” would be more appropriate terminology because while the cumulative economic effect over all of 2013 would be substantial, it would not be felt immediately but rather gradually as the weeks and months went by.
During a lame duck session in December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The act extended the Bush tax cuts for an additional two years and “patched” the exemptions to the Alternative Minimum Tax (AMT) for tax year 2011. This act also authorized a one-year reduction in the Social Security (FICA) employee payroll tax. This was extended for an additional year by the Middle Class Tax Relief and Job Creation Act of 2012, which also extended federal unemployment benefits and the freeze on Medicare physician payments.
On August 2, 2011, Congress passed the Budget Control Act of 2011 as part of an agreement to resolve the debt-ceiling crisis. The Act provided for a Joint Select Committee on Deficit Reduction (the “super committee”) to produce legislation by late November that would decrease the deficit by $1.2 trillion over ten years. If the committee failed to do so, as it in fact had failed to do, another part of the Act directs automatic across-the-board cuts (known as “sequestrations”), split evenly between defense and domestic spending, beginning January 2, 2013. Also, the Affordable Care Act imposed new taxes on families making more than $250,000 a year ($200,000 for individuals) starting at the same time.
At the end of 2011, the patch to the AMT exemptions expired. Technically, the AMT thresholds immediately reverted to their 2000 tax year levels, a drop of 26% for single people and 40% for married couples. Anyone over these reduced thresholds at the end of 2012 would be subject to the AMT. Therefore, more taxpayers would pay more unless some legislation was passed (as was done in 2007) that affects the exemptions retroactively.
Current laws leading to the fiscal cliff
The following provisions of current law are most involved in the fiscal cliff:
- Expiration of the Bush tax cuts extended by President Obama in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010;
- Across-the-board spending cuts (“sequestration”) to most discretionary programs as directed by the Budget Control Act of 2011;
- Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels;
- Expiration of measures delaying the Medicare Sustainable Growth Rate from going into effect (the “doc fix”), most recently extended by the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA);
- Expiration of the 2% Social Security payroll tax cut, most recently extended by MCTRJCA;
- Expiration of federal unemployment benefits, most recently extended by MCTRJCA and
- New taxes imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.
Without new legislation, these provisions will automatically go into effect on January 1 or 2, 2013, except for the Alternative Minimum Tax growth, which may be changed retroactively. Some provisions will increase taxes (the expiration of the Bush and FICA payroll tax cuts and the new Affordable Care tax and AMT thresholds) while others will reduce spending (sequestration, expiration of unemployment benefits and implementation of the Medicare SGR).
Proposals to avoid the fiscal cliff involve repealing legislation containing certain of these provisions or passing new legislation to extend provisions that are due to expire. Different proposals may include changes to some or all of the above provisions. For example, the Congressional Budget Office’s “Alternative Fiscal Scenario” includes only the first four items above. Changes to other provisions are also sometimes included in such proposals; for example, changing the original caps on discretionary appropriations contained in 2011’s Budget Control Act, indexing the AMT exemptions for inflation or the wholesale or partial reform of the tax laws or entitlement programs.
Congressional Budget Office projections
US federal debt from 1940 to 2022. The right side of the diagram projects what would happen to the debt if Congress (a) allows current laws to take effect and reduce the deficit (the baseline) or (b) extends the current policies, such as keeping tax cuts in place (the alternative).
Decisions regarding the fiscal cliff will have meaningful implications for deficits, debt, and economic growth. The Congressional Budget Office (CBO) has projected two fiscal scenarios for the years 2013 to 2022:
- The baseline projection. This scenario would have lower deficits and debt but also have lower spending and higher taxes.
- The alternative fiscal scenario. Higher deficits and debt but lower taxes and higher spending.[note 2]
These paint starkly different fiscal futures. If Congress and the President do not act, allowing tax cuts to expire and mandated spending cuts to be implemented, the next decade will more closely resemble the baseline projection. If they act to extend current policies, keeping lower tax rates in place and postponing or preventing the spending cuts, the next decade will more closely resemble the alternate fiscal scenario.
Baseline projection. The CBO has been publishing baseline projections since 1985. Under “the baseline”, tax cuts are allowed to expire and spending cuts are implemented in 2013, resulting in higher tax revenues plus lower spending, deficits, debt and interest for the next decade and beyond. Future deficits would be reduced from an estimated 8.5% of GDP in 2011 to 1.2% by 2021. Revenues would rise towards 24% GDP, versus the historical average 18% GDP.
The total deficit reduction or debt avoidance over ten years could be as high as $7.1 trillion, versus the $10–11 trillion debt increases if current policies are extended. In other words, roughly 70% of debt increases projected over the next 10 years could be avoided by allowing laws on the books during 2012 to be implemented.
CBO estimates under the baseline projection that public debt rises from 69% GDP in 2011 to 84% by 2035. In the long run, lower deficits and debt should lead to relatively higher growth estimates. But, in the short run, real GDP growth in 2013 would likely be reduced to 0.5% from 1.1%. This would mean a high probability of recession (a 1.3% GDP contraction) during the first half of the year followed by 2.3% growth in the second half.
Alternate fiscal scenario. If Congress “avoids” the fiscal cliff, the future more closely resembles the continuation of 2012 policies, described by the CBO’s “alternative fiscal scenario.” This scenario involves extending the Bush income tax cuts, restricting the reach of the AMT, and keeping Medicare reimbursement rates at the current level (the so-called “doc fix”, versus declining by one-third as mandated under current law). Revenues are assumed to remain around the historical average 18% GDP. Under this scenario, public debt rises from 69% GDP in 2011 to 100% by 2021 and approaches 190% by 2035. This scenario has considerably higher debt and interest payments than the baseline projection, but short-term impact on the economy is avoided.
The Congressional Budget Office estimates that allowing certain laws on the books during 2012 to expire or take effect in 2013 (the baseline scenario) would cut the 2013 deficit approximately in half and significantly reduce the trajectory of future deficits and debt increases for the next decade and beyond. However, the 2013 deficit reduction would adversely impact the economy in the short-run. On the other hand, if Congress acts to extend current policies (the alternative scenario), deficits and debt will rise rapidly over the next decade and beyond, slowing the economy over the long run and dramatically increasing interest costs.
CBO estimates that if the baseline scenario is allowed to take effect in 2013, it would reduce federal spending by $103 billion and increase tax revenues by $399 billion (and another $105 billion “mostly in revenue”) through September 2013 (the end of FY2013). This would amount to a net total of $560 billion, roughly half the $1.2 trillion FY2011 deficit. The White House estimates that a family of four with an income of $50,000 to $85,000 would pay an additional $2,200 in federal taxes.
The CBO has identified the following metrics for its baseline and alternative scenarios for the period starting January 2013:
|Fiscal or Economic Measure||CBO
|Federal deficit in FY2013||$641 billion||$1037 billion|
|Economic growth in FY2013||−0.5% of GDP||1.7% of GDP|
|Unemployment rate for October thru December 2013||9.1%||8.0%|
|Public debt in 2022||58% of GDP||90% of GDP|
Consideration of these scenarios and other options[note 2] leads to what the CBO calls “a broad spectrum of fiscal policy choices”.
Estimated deficit for the first year
The CBO estimated that the total deficit of fiscal year 2012 (which ends on September 30, 2012) will be $1.171 trillion. The CBO also estimated that the total reductions to the fiscal year 2013 deficit by letting current laws take effect (which increase taxes and reduce spending) would be about $560 billion.
Therefore, since the total US public debt was approximately $11.053 trillion as of July 2012, the public debt would climb by the end of FY2013 to either $11.664 trillion (if Congress does nothing, allowing current law to take effect) or $12.224 trillion (if the fiscal cliff is avoided, extending current tax and spending policies into the future), all other considerations remaining the same. This difference amounts to 5.07% of the federal debt in nine months.
Under current laws scheduled to take effect by the end of 2012, the total 2013 deficit will be $612 billion, as opposed to $1,171 billion for the previous year. The chart at the right contains a breakdown of the currently authorized reductions to the FY2013 deficit. The total of this chart is $606 billion but this is without considering economic feedback. Reduced taxes and increased spending, due to the 1.3% contraction in the first half of 2013, as well as other constraints, are expected to decrease the savings by $47 billion, giving a net total of $560 billion in deficit reduction during FY2013.
CBO analysis of policy options
The CBO reported in November 2012 the economic and employment effects of various policy options related to the cliff. Each option has a different GDP and employment impact per dollar of deficit impact. In other words, some choices are more economically efficient. CBO explained why spending cuts have a more significant adverse impact on the economy than tax increases per dollar of deficit reduction: “The larger ‘bang for the buck’ next year of the spending policies under the alternative fiscal scenario occurs because, CBO expects, a significant part of the decrease in taxes (relative to those under current law) would be saved rather than spent.”
Effects of sequestration
The spending reduction elements of the fiscal cliff are primarily contained within the Budget Control Act of 2011, which directed that both defense and non-defense discretionary spending[note 3] be reduced by “sequestration” if Congress was unable to agree on other spending cuts of similar size. Congress was unable to reach agreement and therefore the sequestrations are expected start taking effect on January 2, 2013 if Congress, and President Obama, do not agree to a budget deficit reduction plan. The scope of the law excludes major mandatory programs such as Social Security and Medicare.
The effect on both defense and non-defense discretionary spending will be significant if the cliff is not avoided. Cuts totaling $110 billion per year will be applied from 2013 to 2022, split evenly ($55 billion each) to defense and non-defense discretionary spending. For scale, discretionary funding for 2011 totaled $1,277 billion: budget authority of $712 billion for defense and funding totaling $566 billion for non-defense activities.
During 2013, defense and non-defense discretionary spending would be maintained around 2012 levels due to the sequester. However, the spending begins to rise thereafter, but not at the pace projected prior to the sequester. In other words, the trajectory of spending increases is reduced, but spending is not frozen at 2012 levels. Defense and non-defense discretionary spending increases from 2013–2021 would be about 1.5% annually, significantly below the prior decade.
For example, according to the CBO Historical Tables, defense spending (including overseas contingency operations for the wars in Iraq and Afghanistan) grew from $295 billion in 2000 to $700 billion in 2011, an annual growth rate of 8.2%. Non-defense discretionary spending grew at a 6.6% annual rate during that time, from $320 billion to $646 billion.
The austerity represented by the sequester is not unprecedented; from 1990–1999, defense spending actually declined by about 1% annually, from $300 billion to $276 billion, although non-defense discretionary spending grew by 4.5% annually, rising from $200 to $297 billion.
The CBO estimated the possible impact on defense spending in October 2011 testimony: “Compliance with the caps on discretionary funding could occur through many different combinations of defense and non-defense funding. For example, defense and nondefense appropriations might be cut proportionally relative to the funding that would be necessary to keep pace with inflation. In that case, funding for defense programs apart from overseas contingency operations would drop from $552 billion in 2011 to $538 billion in 2012 before rising again and reaching $637 billion in 2021 (see Table 3).
Between 2012 and 2021, such funding would be $445 billion less than the amount that would occur if the amount of funding for 2011 grew at the rate of inflation. When measured as a share of GDP, funding for defense would decline by about 1 percentage point from 2011 to 2021, or by more than one-fourth (see Table 5). Funding for defense in 2021 (excluding overseas contingency operations) would represent 2.7 percent of GDP; by comparison, annual funding for defense (excluding overseas contingency operations) has averaged 3.4 percent of GDP during the past decade.”
The CBO estimated the possible impact on non-defense discretionary spending in October 2011 testimony: “If defense and nondefense appropriations were cut proportionally relative to the funding that would be necessary to keep pace with inflation, nondefense budget authority would decrease from $511 billion in 2011 to $505 billion in 2012 before rising again and reaching $597 billion in 2021 (see Table 4). Between 2012 and 2021, budget authority for nondefense purposes would be $418 billion less than the amount that would be provided if funding grew at the rate of inflation after 2011. Under an assumption that the obligation limitations for certain transportation programs grow over time at the rate of inflation, nondefense funding in 2021 would represent 2.8 percent of GDP; by comparison, such funding has averaged 4.1 percent of GDP during the past decade (see Figure 6).”
Effects of tax increases
Various sources estimated the 2013 impact on taxpayers (individual and married filing jointly) from the tax increases that would occur if the Bush income tax cuts and Obama payroll tax cuts are allowed to expire. The table below shows the dollar and percentage increase in taxes due and assumes two federal allowances are taken. The interactive tool at the source cited can be adjusted based on the reader’s circumstances.
|Income Level / Filing status||Single||Married
|$50,000||$1,576 / 18%||$1,870 / 26%|
|$100,000||$4,076 / 17%||$3,272 / 17%|
|$150,000||$5,850 / 15%||$5,046 / 15%|
|$200,000||$7,350 / 13%||$6,546 / 14%|
Many experts have argued that the U.S. should avoid the fiscal cliff while taking steps to bring the long-term deficit and debt trajectory under control. For example, economist Paul Krugman recommended that the U.S. focus on employment in the short-run, rather than the deficit. Federal Reserve Chair Ben Bernanke emphasized the importance of balancing long-term deficit reduction with actions that would not slow the economy in the short-run. Charles Konigsburg, who directed the bi-partisan Domenici-Rivlin deficit reduction panel, advocated avoiding the fiscal cliff while taking steps to reduce the budget deficit over time. He recommended the adoption of ideas from deficit panels such as Domenici-Rivlin and Bowles-Simpson that accomplish these two goals.
Other experts at the Center on Budget and Policy Priorities and the Carlyle Group have argued that allowing the tax increases and spending cuts to occur under current law may be necessary to create the “grand bargain” required to get the U.S. deficit and debt trajectory under control for the long-run. In other words, allowing current law to take effect would create conditions under which legislators might be forced to enact better designed deficit reduction approaches of similar or greater magnitude.
Even financial news networks CNBC and CNBC.com are launching a network-wide initiative aimed at calling attention to the fiscal situation. The network’s campaign is called “RISE ABOVE”, a call to action appealing to everyone to rise above partisan political views in an effort to come to agreement on a plan that tackles both the long and short term challenges to the American economy. CNBC plans to engage business leaders, politicians and viewers through a series of programming efforts designed to increase the understanding of the core issues and to raise the level of dialogue beyond the rhetoric and talking points that have saturated media coverage of the ‘fiscal cliff.’
Proposals to mitigate the fiscal cliff
U.S. Federal budget deficit as % of GDP assuming continuation of certain policies for 2012-2022. The baseline deficit assumes current law takes effect, meaning tax cuts expire and spending cuts are applied. Avoiding the “fiscal cliff” increases the projected deficit.
Congressional Republicans have proposed that the Bush tax cuts be extended in their entirety. In August 2012, the Congressional Budget Office (CBO) estimated that extending these tax cuts for the 2013–2022 time period would add $3.18 trillion to the national debt relative to the current law baseline, comprising $2.74 trillion in foregone tax revenue plus another $0.44 trillion for interest and debt service costs.
On July 25, 2012, the U.S. Senate voted 51–48 to pass a bill supporting the President’s tax proposal which extended cuts for most taxpayers, while rejecting the Republican proposal of extending the tax cuts for all 45–54. The U.S. House of Representatives rejected, 170–257, the President’s tax proposal on August 1, 2012.
As of November 1, 2012, a group of senators, now called the Gang of Eight, composed of Democratic Whip Richard J. Durbin D-Il., Finance Committee member Tom Coburn, R-Okla., Budget Committee Chair Kent Conrad, D-N.D., Sen. Michael F. Bennet, D-Colo., Sen. Mark R. Warner, D-Va., Finance member Mike Crapo, R-Idaho., Sen. Saxby Chambliss, R-Ga., and Sen. Mike Johanns, R-Neb., have been working since 2011 but “has so far failed to reach an agreement after more than a year of talks.” Because of the number of spending cuts and tax changes, at least half a dozen committees, such as the House Ways and Means and Senate Finance committees, might want to weigh in on the bill. Congressional rules allow bills to skip committee hearings, but the group lacks the clout to “push its plan through Congress outside the regular order of business”.
On November 16, 2012, the US leaders announced that President Obama (D) met with House Speaker John A. Boehner (R-Ohio) House Minority Leader Nancy Pelosi (D-Calif.) Senate Majority Leader Harry Reid (D-Nevada) and Senate Minority Leader Mitch McConnell (R-Ky.) “to discuss” the plan “to work on” a plan “over the weekend” “to create a plan” that would be ready to present the week of November 26, 2012 concerning the fiscal cliff.
In a three-page letter, Steven Miller, acting IRS Commissioner, outlined the effects of the fiscal cliff and said that the IRS is working under the assumption that Congress would “patch” the Alternative Minimum Tax (AMT). The patch prevents the AMT from impacting many more taxpayers. This is similar to what Congress has done in previous years.
Since the budgetary and economic impact is due to existing laws, Congress would have to pass new legislation and have the President sign it into law to avoid the cliff. Since a Presidential veto requires a two-thirds majority in both the House and Senate to override, a Presidential veto of attempts to avoid the cliff would likely ensure that significant deficit reduction would occur. The President has promised to veto any attempt to bypass the cliff that does not include an increase of tax rates for the wealthy.
- March 23, 2010: President Obama signed into law the Patient Protection and Affordable Care Act. One of this law’s provisions is to impose new taxes on families making $250,000 per year or more starting in 2013.
- December 17, 2010: Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, patching the AMT through 2011 and extending the Bush tax cuts to the end of 2012.
- August 2, 2011: The President signed the Budget Control Act of 2011. This act provided that, if the Joint Select Committee did not produce bipartisan legislation, across-the-board spending cuts would take effect on January 2, 2013.
- February 22, 2012: Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012, which extended the following provisions until December 31, 2012: the 2% Social Security payroll tax cut, federal unemployment benefits and the freeze on Medicare physician payments.
- February 29, 2012: Ben Bernanke popularized the term “fiscal cliff” in his testimony before the House Financial Services Committee.
- July 3, 2012: IMF head Lagarde warned that the threat of “going over the fiscal cliff” could weaken the US economy later in 2012. The IMF also reduced its projection for US growth in 2013 from 2.4 to 2.25 percent of GDP.
- July 17, 2012: Bernanke pushed Congress to avoid the fiscal cliff, warning that a failure to do so will further dampen the sluggish economic recovery.
- July 31, 2012: Reid and Boehner agreed on a continuing resolution that would pay for the day-to-day running of the government until the end of March 2013. This does not affect the fiscal cliff or the debt-ceiling.
- August 7, 2012: Obama signed the Sequestration Transparency Act of 2012, which directed his administration to detail in 30 days how they plan to implement the automatic cuts mandated by the Budget Control Act.
- September 14, 2012: Obama released his 400-page document detailing cuts. http://cdn.govexec.com/media/gbc/docs/pdfs_edit/091412cc1.pdf 
- October 22, 2012: At the third of three presidential debates, Obama says sequestration will not happen.
- November 16, 2012: US leaders announced that they met “to discuss” the plan “to work on” a plan “over the weekend” “to create a plan” that would be ready to present the week of November 26, 2012 concerning the fiscal cliff. …”
Why Not Just Fall Off the Fiscal Cliff?
Contrarians and some politicos on both the left and the right have started to ask the forbidden question
By Joyce Hanson, AdvisorOne
“…As everyone knows by now, considering all the talk by market pundits and business media, fear of falling off the fiscal cliff has become the obsession du jour ever since President Obama won re-election. The threatened results of a failure to resolve the issue – including tax hikes, spending cuts and an almost certain recession – sound so dire that nobody wants the U.S. to fall off that cliff.
Then again, maybe some do. Contrarians and some politicos on both the left and the right have started to ask the forbidden question: Why not just fall off the fiscal cliff?
For example, conservative thinker Marc A. Thiessen of the American Enterprise Institute dared suggest in an opinion piece for The Washington Post on Monday that the best way to start the new year in a bipartisan fashion would be to head over the cliff.
“Today, the only ones in Washington who advocate fiscal cliff-diving are liberal Democrats. It’s time for conservatives to join them. Letting the Bush tax cuts expire will strengthen the GOP’s hand in tax negotiations next year, and it may be the only way Republicans can force President Obama and Senate Democrats to agree to fundamental tax reform,” Thiessen wrote.
True enough, liberal Paul Krugman in a post-election column for The New York Times on Nov. 8 urged Democrats not to make a deal in terms of accommodating Republican demands.
“I don’t mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can’t reach a deal,” Krugman wrote. “The looming combination of tax increases and spending cuts looks easily large enough to push America back into recession. Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.”
Facing What May Become Reality
After the Dec. 31 deadline, if no compromise is reached, both the Bush-era tax cuts and the Obama administration’s payroll tax cut are scheduled to expire. At the same time, $1.2 trillion of automatic “sequestration” spending cuts divided equally between defense and non-defense discretionary programs are set to kick in.
Some market participants are girding themselves to face the reality of Washington gridlock if lawmakers fail to reach any kind of a fiscal cliff compromise, whether it’s a continued kicking of the can down the road or a grand bargain.
For example, Mike Acton (left), director of research for AEW, an institutional investment manager that focuses on real estate, said that contrarians are arguing that if tax rates go back to where they were 10 years ago, it would generate as much as $4.5 trillion of new revenue.
“So if in January the Bush tax cuts went away, that would allow $1.5 trillion of reduction in the debt ceiling as called for by the deficit supercommittee,” Acton said. “They created that as a way to force an agreement.”
Acton noted that falling off the cliff would mean that the capital gains tax, dividend tax, estate taxes and personal income tax rates would all go back up. …”
Greenspan: ‘Markets Will Crater’ With Fiscal Cliff
Former Fed chairman says mild recession is ‘cheap price’ of coming crisis
By John Sullivan, AdvisorOne
“…Former Federal Reserve Chairman Alan Greenspan told Bloomberg Television on Friday that “markets will crater if we run into any evidence that we can’t solve this [fiscal cliff] problem.”
Greenspan, who said recently that big Wall Street banks should allowed to go bankrupt, said, “If we get out of this with a moderate recession, I would say that the price is very cheap.”
Greenspan on the fiscal cliff:
“We have to recognize that this is going to be extraordinarily difficult to solve. All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate.”
On Simpson and Bowles saying that the markets could crash if a deal isn’t made:
“I think it is not only Simpson-Bowles. I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem. And I think the notion that the issue of the impact on the economy is strictly the spending tax issue, is also the market. I think we underestimate the extent to which the market value of assets has a very important impact on real GDP.”
On whether the U.S. is headed into a recession even if a deal is made:
“Not necessarily. I am just saying that we may get a deal, which will take us for next year or so. But the question isn’t that. I think the question is essentially how are we going to stop what is a critical problem here, an extraordinarily rapid rise in what the Department of Commerce calls government social benefits to persons, which has been rising very rapidly bipartisanly in the sense that it has been rising even faster under Republican administrations than Democratic administrations. And they are all very closely involved in these new benefits, the only problem is that it is eating into the savings of the society and our long-term growth. And yes, we can continue for the next year or so without any really serious problems emerging. But I think it is a highly risky endeavor.
“The problem is, if we are going to come to grips with this thing, we are going to have to recognize that even if we have got to pay the cost of a significant rise in taxes to get a significant slowing and then decline in social benefits, that is a very cheap price in the sense that a large increase in taxes required to fund what is currently on the books is going to cause a recession. But I think that if we can get away with that is the only cost to this whole problem, I think that is a pretty good deal.”
On where Republicans and Democrats will find common ground on cutting entitlement programs:
“It is going to be extraordinarily difficult. The issue is that words matter. If you ask the average person in the street about, for example, their social security benefits, they will say we have paid in, it is our money, we have earned it, I am getting it back. It is not welfare, it is not charity. It is equivalent to a private, fully-funded pension fund. It isn’t. It is essentially extremely underfunded. In fact, if we were to go to a fully-funded system, comparable to those fully-funded private systems, we would have to cut benefits by the equivalent of 4% points of payroll taxes or raise payroll taxes by the equivalent amount. Those are very large numbers and would suggest that yes, indeed, people have put money in, but certainly not enough to fund what they are getting back. The notion that we have to confront is that people do not think that this is any different from a private fund. The trouble is that it is.”
On tax policy:
“The problem basically is that we have tried for decades to somehow manage our budget in such a way that, yes we can run deficits of this or that size, and we use it sophisticatedly for fiscal policy. It turns out we cannot do that well. It gets out of hand and this is not an accident. There is no question that raising taxes will turn the economy downward. Ideally I would like to just cut spending. I do not think politically that is feasible because the problem, no matter how you look at it, is fundamentally this extraordinary rise in social benefits to persons. That is the core of the problem. But the issue is, if we can solve it the way I would want to solve it, if we go back to where we were earlier at a much lower level of those benefits because I think what is then going on in recent years, we have not been able to afford.”
On whether tax rate increases or eliminating deductions and closing loopholes will get the revenue agreement:
“I agree with those who argue that marginal tax rates really do matter. And I thought the genius of the Simpson-Bowles plan to identify a trillion dollars’ worth of tax expenditures which Republicans can a look at as subsidies, and the Democrats can look at as increased taxes to upper income groups. The problem is you are looking at the same issue and you can compromise on that. But look, if the issue here is whether you do it tax rates or you do it by taking loopholes out so to speak, obviously the latter is the better choice by far. The issue here is in both cases, you lower the rate of savings in a society and that will curtail capital investment, curtail the rate of growth and productivity, and essentially slow down the rate of real resource creation, which at the end of the day is what funds social benefits.” …”