When Deficit Reduction and Tax Fairness must be avoided, call it a Fiscal Cliff needing a GRAND BARGAIN

David Dayen’s recent posts have referred to a year end “fiscal cliff”, with my comments pointing to the ease with which new tax cuts would be passed by the current Congress. I thought it might be useful for the discussion to describe in a bit more detail this Fiscal Cliff that the CBO estimates, with no new spending/tax cuts. would reduce GDP growth from 2% in 2012 to 1.1% in 2013, with unemployment declining to 7% at the end of 2015, rather than getting to 7% at an earlier point.

Wall Street (Economist Mark Zandi of Moody’s Analytics) expects an agreement effective for 2013 that extends the Bush tax cuts for everyone but high-income households, and and delays about half of the $1 trillion in scheduled spending cuts, but we have seen how Obama tries to use these moments for a Grand Bargain that screws Social Security and Medicare, so what happens after the election is a bit scary, albeit a bit predictable based on past Obama actions and the “fiscal cliff” scare tactics being tossed at us now (there is even a “the Committee for a Responsible Federal Budget” that advocates a “long-term fiscal sustainability” grand bargain of “reforming tax code and entitlement code”).

Well the “cliff” consists of (1) The Alternative Minimum Tax (AMT), currently at 28% for those filing jointly with incomes of $74K or greater, will drop down to $45K, (2) Congress must again pass funds for Medicare Part B (the so-called “doc fix”) lest Part B payment levels to doctors drop 25% for each service, (3) the employee side of the payroll tax returns to 6.2% from the current “stimulus” level of 4.2%, (4) The agree Super Committee’s mandatory cuts (via a sequester) begin and anger our defense industry, (5) Unemployment benefits for workers who have exhausted the standard 26 weeks of benefits are phased out, (6) some temporary research and development tax benefits to corporations expire, (7) THE BUSH TAX CUTS EXPIRE with the loss of the 15% rate for qualified dividends, long term capital gains, and hedge fund worker earnings really angering the rich, (8) and finally, with a little bit of irony, the infamous debt limit will hit again with calls for further cuts as everyone works hard to avoid the above debt limit discussion as the they try to avoid the spending cuts and tax increases in the FISCAL CLIFF.

According to Goldman Sachs, the total of amount of dollars the US government will be taking out of the economy (deficit reduction) is about $600 billion, with CBO saying the number is closer to $400 billion, a year, or as we now use 10 year numbers for better PR, it is A DEFICIT REDUCTION of $6 TRILLION. So the Congressional Budget Office says 3.6% of GDP in fiscal 2013, David Greenlaw of Morgan Stanley says 5%, while others say the effect would be much smaller and indeed secondary to the appreciation in the dollar (China slowing, the EU problems) destroying our exports and killing our economy. But the last time we had this large as a percentage of GDP change back in 1969, the economy did slip into recession, so all the economists may be able to claim they made the right prediction.

But there is this thing called tax fairness – the Clinton rates despite the higher rates for some non-rich (will the child credit increase and the alt min levels not be fixed again?) is much fairer, and Money taken from the rich if redirected to the non-rich spenders has a stimulus effect making both rich and non-rich happier. Will campaign contributions prevent tax fairness and stimulus via non-rich spending?

Meanwhile there are some funny moments in this debate – mostly from the Wall Street Journal where they are predicting a 30% stock market drop if we touch the tax breaks for the rich. You see, the top dividend tax rate will rise to 43.4% from 15% (Clinton super rich rate of 39.6% plus ObamaCare 3.8% surtax on all forms of investment income, meaning the 10% dividend after tax yield is constant post Fiscal Cliff only if stock price drops 33.4%. I’ve concluded that the Wall Street Journal doe not need the Comics – it is good for a laugh as is! 🙂

Meanwhile it is time for Democrats to become deficit hawks and demand nothing be done about the “Fiscal Cliff” – and TO only reluctantly agree with new tax cuts – but only for the middle class and poor, and with new infrastructure spending rather than military spending, with no entitlement cuts, letting the GOP be the “responsible” party, for once, that saves us from the dreaded “Fiscal Cliff” by forcing these on us. I do love politics 🙂

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