Fiscal cliff tax vote now shifts debate to deficit reduction
Congressman Paul Ryan (R-WI) says he voted for the fiscal cliff deal on New Year’s Day to protect as many taxpayers as possible (98%) from a permanent tax increase.
Instead, the fiscal cliff deal makes the Bush tax cuts permanent for the middle class - thereby shifting the debate to cuts in entitlement spending to achieve Obama’s promised “balanced approach” to deficit reduction.
I would have also supported this vote to get to phase two – spending cuts!
Good Points of Fiscal Deal
To the angst of some Obama supporters, Congress has now voted to make the often maligned Bush tax cuts for the middle class - permanent tax cuts. It will take a vote of both houses and the signature of the president to raise them again.
The temporary 2% Social Security tax cut needed to expire, because Social Security has for the last two years paid out more than it has received in payroll taxes - $45B in 2011, increasing to $165B in 2012.
This gap in Social Security funding is entirely filled by revenue the government borrows, despite Senator Dick Durbin’s statement that Social Security has not added one penny to the deficit – another financial genius from Illinois!
Estate Tax exemptions remain at $5M for individuals and $10M for families, but the vote increases the tax rate to 40% from 35% for estates above that amount. If the fiscal cliff bill had not been approved, however, the tax rate would have reverted to 55%.
Capital gains are increased from 15 to 20 percent, for singles over $400,000 or $450,000 for families, which is slightly more than half of the 39% for the highest federal income tax rate.
The vote permanently reduces the Alternative Minimum Tax, or AMT, for up to 25 million additional middle-income taxpayers and indexes that amount to inflation. This tax code change has been long overdue for taxpayers, who were not intended to be affected.
The vote extends for five years up to $2500 tax credit for college tuition – a credit, not a deduction. A tax credit allows the taxpayer to spend 100% of that money for the tuition and pays no tax on the expenditure.
Again, the 27% cut in Medicare reimbursement to doctors is blocked for one year. The law has been based on an obsolete 1997 budget formula. To prevent cuts in Medicare service, this portion of the bill should have been made permanent.
Finally, the Sequestration patch is there for only 60 days. After 60 days, the Sequestration law requires $109B across the board spending cuts and still could be used to cut the deficit spending if Obama and Congress lack the courage to come up with needed cuts to raise the debt ceiling limit.
Bad Points of Fiscal Deal
Despite Associated Press headlines “Congress avoids tax hikes,” most households (77%) will see an average tax increase of $1635 primarily due to the elimination of the temporary 2% Social Security payroll tax cut.
In addition, with the increases in taxes on the wealthy, including estate taxes, reducing the marriage tax deduction and the 2% payroll tax increase in Social Security, there will be $620B in tax hikes, with only $15B in spending cuts – a ratio of 41:1 in new tax dollars for each dollar in spending cuts.
The $62B received from taxing the wealthy will be applied to the $1089B annual deficit spending. That will decrease the annual deficit by 1.4%. So over the next 10 years, the tax increase is $620B while the deficit spending will increase over $4356B.
Originally, the fiscal cliff vote was supposed to be about deficit reduction, however, new spending actually increases the debt over next 10 years, with the tax cuts, subsidies to green energy, NASCAR, Hollywood supporters, electric motorcycles, one additional year in the unemployment extension, and that isn’t even half of the items hidden in the nooks and crannies of the 153 page fiscal cliff bill to rally congressional votes – really transparent process, right?
With the debt ceiling at $10.6T when Obama took office in January 2009, increasing to $16.4T in January 2012, phase two of the debate must now shift to Obama making good on his promised “balanced approach” to deficit reduction.
The leverage now shifts to the House Republicans because it’s the president’s turn to compromise through spending cuts despite his party saying there will be no entitlement cuts. The president’s ratings dropped during the last debt ceiling debate, when Americans saw that Obama wouldn’t negotiate the ceiling and kept overspending tax dollars.
The fiscal cliff tax deal postponed the tough decisions on government’s deficit spending, giving them a reprieve from budget cuts that were also scheduled to start taking effect automatically Jan. 1.
Those tough decisions could arrive as early as February, when Congress will need to raise the $16.4T federal borrowing limit (debt ceiling), so the government can keep paying its bills.
The debt ceiling has already been breached, but Treasury Secretary Geithner is starting to suspend the sale of some Treasury securities in an amount of $200B, manipulating the debt, to give Congress and the administration more time to find spending cuts.
House Republicans, who objected strongly to the fiscal cliff deal passed Tuesday, probably will not agree to raise the debt limit without offsetting spending cuts this time. Let’s see if Obama does his balanced approach for deficit reduction.