What is a Fiscal Cliff ? Obma's stumbling block !
House Speaker John Boehner and President Obama must come together on a deal if Washington is going to avoid the fiscal cliff.
NEW YORK (CNNMoney) -- The fiscal cliff is a man-made disaster waiting to happen.
It starts to take effect in January and includes $7 trillion worth of tax increases and spending cuts over a decade.
While that might seem like a deficit hawk's dream come true, it's anything but.
"It's too big, too quick, and focuses on the wrong parts of the budget," said Maya MacGuineas, who is spearheading the nonpartisan Campaign to Fix the Debt.
Among the policies at issue: reductions in both defense and non-defense spending; the expiration of the Bush tax cuts; the end of a payroll tax holiday and extended unemployment benefits; and the onset of reimbursement cuts to Medicare doctors.
In addition, the debt ceiling -- the legal limit on federal borrowing -- will need to be raised by early next year from its current level of $16.394 trillion.
If left in place, the fiscal cliff would lead to the biggest single-year drop in the annual deficit as a percent of the economy since 1969.
But because it would be so abrupt and arbitrary, it also could throw the United States back into a recession next year, when more than $500 billion will be taken out of the economy.
To avoid that, President Obama and Congress will need to act quickly to avert at least some parts of the fiscal cliff.
So what, exactly, makes up the fiscal cliff?
Automatic spending cuts
Since Congress failed last year to reach a bipartisan debt-reduction deal, the Budget Control Act requires automatic spending cuts to commence on Jan. 2 that will amount to $1.2 trillion in deficit reduction over 10 years.
Defense: $55 billion will be cut in 2013 from projected levels of discretionary defense spending. That translates into at least a 10% cut to every program, project and activity that's not explicitly exempt.
Nondefense: $55 billion will be cut from projected levels of nondefense spending, which includes things like education, food inspections and air travel safety. Budget experts estimate the cuts will result in at least an 8% cut to programs, projects and activities.
Bush tax cuts
The Bush tax cuts, the eternal partisan trip-wire, are set to expire Dec. 31. And as a result:
Income tax rates: Rise to 15%, 28%, 31%, 36% and 39.6%, up from 10%, 15%, 25%, 28%, 33% and 35%.
Capital gains rate: Rises to 20% from 15% for most filers.
Qualified dividend rate: Rises to one's top income tax rate, up from 15% for most filers.
PEP/Pease limitations: Restored. High-income households may not be able to take some itemized deductions and personal exemptions in full.
Child tax credit: Falls to $500 per child from $1,000. The refundable portion also reduced.
American Opportunity Tax Credit: Expires. The lesser value HOPE tax credit for college tuition is reinstated. Several smaller education tax benefits also expire.
Earned Income Tax Credit: Expansion of eligibility for the credit expires.
Marriage penalty relief: Expires. Effectively that means a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.
Estate tax: Parameters revert to pre-2001 levels. The exemption level falls to $1 million from $5 million; and the top tax rate on taxable estates rises to 55%, up from 35%.
Expired already for 2012. Income exempt from the Alternative Minimum Tax in 2012 -- for which taxpayers will file returns next year -- falls to $33,750 for individuals and $45,000 for married couples. That's down from $50,600 and $78,750, respectively, if the exemption amounts had been adjusted for inflation.
As a result more than 30 million people will be hit by the so-called "wealth" tax, up from 4 million to date.
Payroll tax holiday
Expires. The Social Security tax rate reverts to 6.2%, up from 4.2%, on the first $110,100 in wages. Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.
Unemployment benefits extension
The federal extension expires. That means workers who lose their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 99 weeks in state and federal benefits that had been available until recently.
By one estimate, more than 2 million claimants will lose their benefits by January.
A host of smaller individual and business tax breaks will have expired. A bipartisan bill from the Senate Finance Committee proposes to extend many of them, but it has not passed the Senate or House yet.
Medicare doc fix
Expires. Medicare payment rates for physician services drops by 27%.
Some budget experts count as part of the fiscal cliff the onset of a new Medicare surtax on high-income households under health reform.
But unlike the other fiscal cliff tax provisions, the new tax was not written into law as a wink-wink "temporary" provision. It is, however, included to reflect the magnitude of tax increases set to take effect simultaneously in 2013.
A 0.9% surtax will apply to wages on earned income over $200,000 ($250,000 if married). That's on top of the 1.45% Medicare currently owed on all wages. Those making between $200,000 and $500,000, for instance, will only pay about $633 extra while households making $1 million or more would pay another $11,242.
A 3.8% Medicare surtax will also apply for the first time to at least a portion of high-income households' investment income
Is this one of the ones the Republicans are fighting to maintain along with the other Bush tax cuts that run out?
should obama make a deal?
Let’s Not Make a Deal
By PAUL KRUGMAN
To say the obvious: Democrats won an amazing victory. Not only did they hold the White House despite a still-troubled economy, in a year when their Senate majority was supposed to be doomed, they actually added seats.
Nor was that all: They scored major gains in the states. Most notably, California — long a poster child for the political dysfunction that comes when nothing can get done without a legislative supermajority — not only voted for much-needed tax increases, but elected, you guessed it, a Democratic supermajority.
But one goal eluded the victors. Even though preliminary estimates suggest that Democrats received somewhat more votes than Republicans in Congressional elections, the G.O.P. retains solid control of the House thanks to extreme gerrymandering by courts and Republican-controlled state governments. And Representative John Boehner, the speaker of the House, wasted no time in declaring that his party remains as intransigent as ever, utterly opposed to any rise in tax rates even as it whines about the size of the deficit.
So President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.’s demands?
My answer is, not far at all. Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of victory.
In saying this, I don’t mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can’t reach a deal. Both the Bush-era tax cuts and the Obama administration’s payroll tax cut are set to expire, even as automatic spending cuts in defense and elsewhere kick in thanks to the deal struck after the 2011 confrontation over the debt ceiling. And the looming combination of tax increases and spending cuts looks easily large enough to push America back into recession.
Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.
Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.
Mr. Obama essentially surrendered in the face of similar tactics at the end of 2010, extending low taxes on the rich for two more years. He made significant concessions again in 2011, when Republicans threatened to create financial chaos by refusing to raise the debt ceiling. And the current potential crisis is the legacy of those past concessions.
Well, this has to stop — unless we want hostage-taking, the threat of making the nation ungovernable, to become a standard part of our political process.
So what should he do? Just say no, and go over the cliff if necessary.
It’s worth pointing out that the fiscal cliff isn’t really a cliff. It’s not like the debt-ceiling confrontation, where terrible things might well have happened right away if the deadline had been missed. This time, nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013. So there’s time to bargain.
More important, however, is the point that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.
Meanwhile, the president is in a far stronger position than in previous confrontations. I don’t place much stock in talk of “mandates,” but Mr. Obama did win re-election with a populist campaign, so he can plausibly claim that Republicans are defying the will of the American people. And he just won his big election and is, therefore, far better placed than before to weather any political blowback from economic troubles — especially when it would be so obvious that these troubles were being deliberately inflicted by the G.O.P. in a last-ditch attempt to defend the privileges of the 1 percent.
Most of all, standing up to hostage-taking is the right thing to do for the health of America’s political system.
So stand your ground, Mr. President, and don’t give in to threats. No deal is better than a bad deal.