Off the fiscal cliff – what happens to us?
All over we hear and see and read about all the various stuff about the fiscal cliff; the money, the spending, the debt, the taxes… but what we don’t see if what happens to every day people once we go off? It appears we will “fall off this cliff” since neither side budged much today, the last day of 2012.
First, what exactly is the “fiscal cliff”? The fiscal cliff is an inapt metaphor for the looming consequences of some very bad congressional decisions. On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect. That’s equal to about four percent of GDP, which is, according to the Congressional Budget Office, more than enough to throw us into a recession. The cliff metaphor is more of how economic markets may react, with the Us based markets likely “jumping off a cliff” into a downward spiral with NASDAQ and NYSE dropping sharply the first few weeks. Other markets will likely see a hard drop then level off.
There are some good and some bad points that happen with this “cliff” that starts Jan. 2. Also some places use the term “cost X amount” as if it was a power bill or car payment, think of the “cost” term (used below) more as “the government would have had to find the money elsewhere to continue these tax breaks.” Five tax measures have provisions expiring at year’s end:
- 2001/2003 Bush tax cuts: These cut individual income tax rates, pared back the estate tax, lowered rates for investment income (such a capital gains and dividends) and expanded a number of tax credits, including the child tax credit. According to the Economic Policy Institute, these would cost $203 billion next year if extended.
- 2009 stimulus: This included expansions of the Earned Income Tax Credit, which provides aid to low-income workers, as well as the child credit, and the American Opportunity tax credit, which helps families pay for college tuition. Extending these would cost $10 billion next year.
- Payroll tax holiday: This was included in the December 2010 tax deal and slashed the payroll tax rate on employees from 6.2 percent to 4.2 percent. Extending it would cost $115 billion next year.
- Alternative Minimum Tax: Intended as a baseline tax for high earners, the AMT is not indexed for inflation and would hit a lot of middle-class taxpayers if not “patched” before next year. A patch would cost $114 billion.
- Extenders: This is the catch-all term tax wonks use for corporate tax breaks that need to be extended regularly. Doing that again, as per usual, would cost $109 billion.
Then comes the forced spending cuts, four types of spending cuts take effect next year:
- The sequester (or, as I sometimes like to call them, “the cuts politicians hate to allow to continue”): Mandated by the Budget Control Act of 2011 (better known as the debt ceiling compromise), this institutes a 2 percent cut in physician and other providers’ Medicare payments, and a 7.6 to 9.6 percent across the board cut in all discretionary spending, except programs for low-income Americans. The cuts are evenly divided between defense and nondefense programs, with analysts predicting a crippling effect on all affected departments and agencies. To the rest of us, this is a much needed weight loss program to a massively bloated and overweight government, which enjoyed paying off medical special interests. This spending cut can be averted by repealing the portion of the BCA mandating the cuts, which amount to about $110 billion next year (2013).
- Budget caps: Also in the Budget Control Act, these set a firm limit on discretionary spending within which policymakers must operate. They are set to reduce spending by $78 billion next year. Politicians hate this one because it forces them to actually live within the means of income versus expenditure, much like the general public has to.
- Doc fix: This policy, passed every Congress for 15 years now but lapsing at the end of 2012, reverses temporarily cuts that Congress passed, and former President Bill Clinton signed, as a (laughable) deficit reduction measure in 1997. The cuts, known as the “Sustainable Growth Rate” or SGR, require that growth in provider payments not exceed growth in Gross Domestic Product. If the doc fix is not extended, physician payments would fall by almost 30 percent, dwarfing the cuts enacting as part of the debt ceiling deal. That would cut spending by $14 billion next year. This will force doctors and physicians to resort to a more free market level of prices, rather than freely charging what rthey want because the government paid it no matter what. In the end, doctors will have to sell their 10th $500,000 car and have to live with the 9 they have.
- Unemployment insurance: Unemployment insurance was expanded following the recession, and due to the slow recovery this expansion has been regularly extended. Doing so again would cost $39 billion. This one was sent through the House as a solo bill temporarily extending benefits, which continues the problem of paying people to not work, instead of realizing they need to get off their lazy butts and find a job.
Next, lets look at a time frame and how it relates to every day people. Some talking heads will claim this will send us back into a recession, which in most measures of untampered and non cherry picked methods of fiscal measurements, we have remained in a recession since the liberals took on their blank check method to spending starting fiscal year 2008. Even going off this “cliff”, the economy and private sector should still see growth from 2.4% to 6.1%, provided Congress doesn’t screw everything up a month or two into the New Year. If the “cliff” crisis hits in full, both short and medium-term deficit problems in the US would vanish (a very good thing). The CBO projects that under current law, debt held by the public will fall to only 58 percent of GDP by 2022, below the 60 percent mark that many economists warn against exceeding. By contrast, debt would climb to 90 percent of GDP if current policies continue, the highest point since after World War II.
These are all provided that no budget is passed by the listed times:
- As it relates to everyday people, the first and immediate thing we see in 2013 is more taken from our paychecks starting the first week or two in Jan. 2013 (low to middle class will see an extra $10-50 taken from their paychecks every week).
- By the end of the month (Jan. 31) the full slew of payroll tax increases is seen by everyone that has a job.
- Come April 15th tax time all of a sudden people that enjoyed tax breaks from the AMT (Alternative Minimum Tax) will see that gone and be required to pay the full amount. The higher rates starts for those making $175,000 per year (single or married joint). For companies (many of which paid congressmen/women under the table to continue the business AMT), this means these businesses will have to pay much higher tax rates. For most companies, this means laying off workers rather than cutting top level management salaries, so the CEOs will continue to collect their untold millions, while they lay off workers. Come tax time if nothing is done, the average normal middle class person (provided they still have a job) would see their tax bill increase in the neighborhood of $3,500 per year. This means lower income people who normally saw refunds of $5,000 a few years ago provided they still make approximately the same, would only see a refund in the $2,000 range. People that paid $12,000 last year would see it jump to over $16,000. People making around $1 million would see it jump an average of $254,000, or around 11% of their yearly income.
- By mid-summer Federal offices, states and contractors that rely greatly on federal funds start to dry up and shut down. States that rely heavily on Federal funds like New York, California, Michigan and other liberal states will be in serious trouble as they have to find ways to continue their reckless spending without Federal money. Federal offices shut down (including the post office), Federal employees start to strike demanding the government pass a budget, even if it means continuing on the same path to self destruction. As it progresses, police departments go to skeleton crews (crime runs rampant), road crews refuse to repair roads, and things just start falling apart nationwide, less so in fiscally conservative areas.
Now if you take all this into consideration, both sides of the Congressional isle unwilling to compromise (by this I mean the Democrats will only accept 100% victory, and will say no to anything Republicans suggest), failed leadership by the president, combined with the line of reasoning in my prior post (LINK), this will give Obama the very ammunition he needs to declare martial law. Starts with taking our guns, then start locking up conservatives starting with government officials to get them out of the way then moving to Constitutional Patriots fighting against the illegal presidency and martial law… in the end if Congress doesn’t come to some sort of agreement AND get the Presidents signature, we are in for full blown civil war by late summer 2013 to early 2014. Lets just hope it never comes to that. All because overpaid fat cat politicians refuse to bring forth a fiscally responsible solution.