Fiscal Cliff: Is It a Good Deal?
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?
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.
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
- $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.
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.