So Simple Even A Congressman Could Understand It…

I don’t know about you, but I am bored to death with the Fiscal Cliff obsession. This may be the signle greatest example of excess media hype since Y2K. We find out how devastating this will be very soon. I do not believe history will look back kindly at how many people and institutions handled themselves over this period. (Pathetically irresponsible are the first words that come to mind).

What is causing all the sturm und drang? Is this really a Mayan apocalypse of expiring tax breaks and sequestered spending cuts.

Hardly — here is what we are discussing, in terms so simple even a congressman could understand it:

• Bush tax cuts expire; tax rates revert to Clinton-era levels. Recall this was originally designed to get rid of that pesky surplus (mission accomplished), and to expire in 10 years. It is now year 13;

• Top marginal rate go from 35% to 39.6%; Middle-class tax payers see increases of ~$2,200 per year;

• Payroll tax cut stimulus expires; Americans will go back to paying 6.2% up from the current 4.2%, this rate applies to the first $113k of income.

• Unemployment insurance expires for 2.1 million long-term unemployed, with another 1 million Americans scheduled to see those benefits terminate Q1 2013.

• Sequestration kick in. $1.2 trillion in cuts spread out over the next decade. (That’s hardly a cliff after all).

• Specific Savings: $492 billion come from Defense; half from discretionary programs (non defense, non entitlements). That adds up to $984 billion — the balance of $1.2 trillion are interest rate savings on the smaller debt.

• Annual Spending Cuts: The specific savings amounts to $55 billion in Pentagon cuts plus $55 billion from non-defense discretionary programs.

• Alternative Minimum Tax patch expires. A messy set of repairs to that operates to fix the simple error of the AMT not being inflation adjusted since 1969.

• Medicare doctor payment adjustments: Another annual fix-the-original-error expires tomorrow. Without this, Medicare doctors get a 26.5% Medicare payment reduction.

All Most of these will be phased in over the next year and decade. For example, the tax rate increase won’t have to be paid until you file your taxes in April 2014.

None of these are simple or painless, but they hardly amount to the world ending depression many are claiming. It will be a minor drag on the economy at a time when it is still soft, not yet fully recovered from the financial crisis.

All of the above is the opposite of classic Keynesian stimulus — raising taxes and cutting spending during economic weakness (then reversing it during strength). Those of you who are anti-Keynes should therefore be rooting for this.

Sources:
Falling Off the Fiscal Cliff
Jason Saving
Dallas Fed, December 2012 
http://www.dallasfed.org/research/eclett/2012/el1214.cfm

The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ
Suzy Khimm, Ezra Klein, Dylan Matthews and Brad Plumer
Washington Post, December 3, 2012  
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/27/absolutely-everything-you-need-to-know-about-the-fiscal-cliff-in-one-faq/

The Guide to Going Off the Cliff
George Zornick
Nation, December 29, 2012 
http://www.thenation.com/blog/171932/guide-going-cliff#