Fiscal Cliff: Is It a Good Deal?

After a last-minute heroic effort led by Vice President Joe Biden and Mitch McConnell, the Congress came together and passed a bill to avoid the fiscal cliff on New Year’s Day.

The purpose of the new law is to prevent the U.S. economy from sinking back into recession because of a series of tax hikes and spending cuts.

Does it do that? Is it a good deal?

The Deal

It was a remarkable whirlwind demonstration of lightening fast open government.

Yesterday, the U.S. government made the complete text of the bill and a CBO assessment of its cost available on the Internet for all the world to see:

HR 8 – The American Taxpayer Relief Act of 2012
– U.S. Congressional Record (Thomas.gov), 1/1/2013
Estimate of Budgetary Effects of American Taxpayer Relief Act of 2012
– Congressional Budget Office (CBO), 1/1/2013

These are the very documents that 535 U.S. Congressmen and Senators used to make their decisions and cast their votes. You could have read them yourself during the debate.

The completed roll call votes, by name, of all 535 legislators are on the Net:
Senate HR8 Roll Call Vote
House HR8 Roll Call Vote

You can check to see how your representatives voted. Both Senators in my State voted for it. My local Congressman, remarkably, was one of only 16 Democrats to vote against the bill. On his Congressional web site he called the deal “yet another short-term, Band-Aid solution“.

House Speaker John Boehner quietly voted for the bill, as did Republican Paul Ryan. House Minority Leader Eric Cantor voted against it.

Avoiding the Fiscal Cliff

Did the Biden/McConnell deal get the job done?

The only way to know for sure is to compare the New Year’s Day deal with the CBO definition of the fiscal cliff.

Last May, the CBO quantified the fiscal cliff and its effect on the economy:
Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013
– Congressional Budget Office (CBO), 5/12/2012

CBO Defines Fiscal Cliff – May 2012:

  • $119 Billion: The Alternative Minimum Tax
  • $103 Billion: Income, estate and gift taxes
  • $95 Billion: Payroll Tax Holiday
  • $65 Billion: Other provisions
  • $18 Billion: Obamacare
  • $65 Billion: Sequestration
  • $26 Billion: Unemployment Benefit Expiration
  • $11 Billion: Medicare “doc fix”
  • $104 Billion: Other Revenue and Spending Changes
    TOTAL = $607 Billion

The CBO said if breached, the fiscal cliff would reduce GDP by -1.3% the first half of this year and send the U.S. economy back into recession.

According to the CBO, as near as can be surmised, here are the tax hikes and spending cuts that came out of the New Year’s deal…

CBO Quantifies Biden/McConnell Fiscal Cliff Deal:

  • $207 Billion: Title 1 – General Extensions
    • Middle class tax cuts below the $400K income limit
    • Alternative Minimum Tax Adjustment
    • Estate Tax Rate set to 40%
    • Capital Gains Rate Increased to 20%
  • $6 Billion: Title 2 – Individual Tax Extensions (new)
    • Discharge of principle residence indebtedness
    • Tuition and tuition related expenses
    • Tax-free retirement fund charitable contributions
    • Many Others
  • $63 Billion: Title 3 – Business Tax Extensions (new)
    • Many, many unrelated new expenses
  • $5 Billion: Title 4 – Energy Tax Extensions (new)
    • 2 or 3 vehicle credit
    • cellulosic biofuel producer credit
    • biodiesel fuel incentives
    • Others
  • $22 Billion: Title 5 – Unemployment Benfits (new)
  • $13 Billion: Title 6 – Medicare “Doc Fix”
  • $14 Billion: Title 9 – Budget Provisions
    • Undefined Pay-as-you-go (PAYGO) scorecard cost

    TOTAL = $330 Billion

At first glance it appears that a little over half of the tax hikes and spending cuts needed to avoid recession were reversed. However, such is not the case.

There are four major new spending items totaling $96 billion added into the new law. That reduces its recession fighting potential to only $234 billion dollars of the original $607 billion the CBO identified.

In other words, the new law reduces the chances of another recession by about 1/3rd!

The $74 Billion Boondoggle

$74 billion of the new spending added to the deal are in the Title 2, 3 and 4 sections of the law. They contain long laundry lists currying political favors and vote buying:

  • 7-year recovery period for motorsports entertainment complexes
  • Increased expensing limitations and treatment of certain real property as section 179 property
  • Cover over costs of rum excise taxes to Puerto Rico and the Virgin Islands
  • Cost recovery for restaurant improvements
  • Accelerated depreciation for business property on an Indian reservation
  • Exclusion from income for employer-provided mass transit and parking benefits
  • Tax-exempt financing for New York Library Zone
  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings
  • New markets tax credit
  • American Samoa economic development credit
  • Railroad maintenance tax credit
  • Academic bonds
  • Etc., etc,. etc.

The new costs contribute little toward avoiding recession. $5 billion goes to new green energy incentives. (Think Solyndra)

The remaining $22 billion in the $96B in new spending is for a one year extension in unemployment benefits.

The Sequestration Switch

The most telling thing of all in the new law is that it delays implementation of sequestration for two months.

In other words, we got $96B in new spending, yet the only spending cuts in the fiscal cliff were stopped cold.

A delay in sequestration is a smokescreens. It folds it into the middle of yet another debt ceiling debate in a few weeks. That cleverly allows the politicians to have a “do over” when it comes to raising the debt ceiling. They can pull the old Washington two-step and fold sequestration into one of it’s famous mega-trillion dollar spending cut “grand bargains”, which don’t really cut spending at all!!

Congress will quietly disappear sequestration spending cuts into the next debt deal.

Conclusions

Everyone is happy. World equity markets are up into the stratosphere today. The President is happy. Vice President Joe Biden is a hero. Congress is ecstatic that they temporarily overcame their own ineffectiveness.

The deal has a positive outcome… it clarifies the future tax situation by making most of the Bush-era tax cuts permanent and ties other items to the rate of inflation as they should be. The new law even got the endorsement of the much-hated tax villain, Grover Norquist!

Pull off the covers, though, and the fiscal cliff deal hammered out in the middle of the night on New Year’s Eve comes up short.

The new law only reduces the fiscal cliff recession threat by 1/3rd and it contains $96 billion in new, mostly unfunded spending. Much of the new spending is for boondoggles to curry political favors.

It delays the start of sequestration two months in an obvious political maneuver to squelch it complete and fold it into future debt talks.

At the bottom line, though, this new law creates an entirely new problem… a $3.9 trillion budget shortfall over the next 10 years!

In other words, we just witnesses politics as usual in Washington DC!

The debt wars will begin anew in a couple weeks.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jan 2, 2013, in Business, Debt crisis, Deficit, economics, fiscal cliff, Government, news, Opinion, Politics, Taxes. Bookmark the permalink. 5 Comments.

  1. If the original estimate of fiscal drag was $607 billion, and now it is $234 billion in fiscal drag, isn’t that two thirds being eliminated?

    What is galling is the pork and corporate welfare just continues.

    The net effect on me the HR department says is my paycheck will be 2% smaller next week. No Pizza and beer for the super bowl this year!

    • I obviously wasn’t very clear. Sorry. 😦

      To eliminate the fiscal cliff drag we would have had to undo all the tax increases and spending cuts identified by the CBO.

      What we did was only undo $234B of the $607B for this year… a little over 1/3rd of the total.

      The issue was complicated because $96B more in new spending was added to the mix. That should have some stimulative effect on the economy. How much, though, is open to interpretation. 😉

      • Go it. There is still plenty of fiscal drag left. That means when the next cliffs on debt ceilings and budget cuts come up, 2013 is going to be an austerity type of year on fiscal policy. This would fit with a political business cycle theory where the first years of a President’s term suck, and then the juice is pumped in for the election.

      • We hear a lot of talk about austerity or no austerity as if we have a choice in the matter; that we can equally chose one or the other.

        We are approaching the time when there isn’t a choice… that time will be upon us when servicing the national debt becomes the biggest expense in the federal government’s budget. We could get there as early as the end of Obama’s 2nd term.

        No “grand bargain” that the current government is likely to come up can prevent it within the short time needed.

  1. Pingback: Its Official: Debt Ceiling Obliterated! « Inform The Pundits!

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