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The Fiscal Slope, and Why Words Matter

I want to revisit Chad Stone’s important analysis about the “fiscal cliff” and the dangers of metaphorical language. The truth is that there’s no such thing as a “cliff” in fiscal policy. First of all, everything is changeable, in many cases retroactively so. Second, it’s not like on January 1, 2013, without Congressional action, all Americans will get a tax bill for $10,000 or so, and half the public workforce will get sacked. Most fiscal policies are far more gradual. In this case, about half of the fiscal impact of the fiscal slope (not cliff) will not hit until tax season:

In fact, the slope would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution). This means that if there is no agreement by January 1, policymakers will still have some (although limited) time to take steps to avoid the serious adverse economic consequences that the Congressional Budget Office (CBO) outlines in its recent analysis of what will happen if the expiring tax cuts and new spending cuts take effect on a permanent basis […]

Policymakers in 2010 extended through December 31, 2012 the Bush-era tax cuts, along with the 2009 Recovery Act’s expansions in several tax credits. They also limited the reach of the alternative minimum tax (AMT) in 2011 but did not similarly “patch” the AMT for 2012. Altogether, the scheduled expiration of these provisions accounts for nearly half (46 percent) of the $483 billion reduction in the deficit between 2012 and 2013 that is due to the expiration of various tax cuts and spending increases plus sequestration (and almost 40 percent of the total $560 billion reduction in the deficit in 2013).

But these individual income tax changes will not reduce taxpayers’ cash flow on January 1 by anything like the full revenue increase they would produce over the course of the year. As CBO states, the immediate impact on most households’ cash flow will be limited to an increase in taxes withheld from their weekly or monthly paychecks, while those taxpayers newly falling within the reach of the AMT in 2012 will not actually pay those higher taxes until they file their returns in subsequent months.

The expiration of the payroll tax cut and extended unemployment benefits, about 25% of the deficit reduction, is more immediate (so of course, those are the measures no one is talking about extending). But the Bush tax cuts simply don’t have to be resolved right before January 1. The automatic spending cuts from sequestration accounts for 13% of the deficit reduction in 2013, relative to the 46% for the Bush tax cuts. That spreads over a 10-year window, and even though they are somewhat front-loaded, the cuts fall over the entire fiscal year. So again, there’s time beyond the “cliff.” There are some other “tax extender” policies that account for the rest, and again, tax policies like that could be changed after the fact (and they often are).

This is important because we don’t know who will hold power in Congress come 2013, or who will hold the Presidency. So those outcomes may determine whether there’s momentum toward resolving the fiscal slope at all in a lame duck session. It’s useful to describe it as a fiscal slope, so you don’t get into the game of allowing a hostage taking with a defined timeline. You could let the Bush tax cuts expire, for example, and just wait out those who want a permanent extension.

Gaming this out will be crucial for progressives who would rather not see a grand bargain-type outcome that cuts the safety net in exchange for minor accommodations on taxes. In a cliff situation, the pressure would get racheted up. In a slope, you can take more air out of the balloon. There is also the question of how the debt limit plays into all of this, but again, the election outcome will go a long way to determining that.

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David Dayen

David Dayen

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