Cliff Looms; It’s Anyone’s Guess How Bad the Fall Could Be

Cliff Looms; It’s Anyone’s Guess How Bad the Fall Could Be
November 13, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Big cliff, sidewalk crack, or something in between? Americans may soon find out.

On January 1 the so-called “fiscal cliff” will be reached unless Congress and the president agree to avert it.The effect of its big tax hikes and smaller spending cuts on the economy remain a matter of much speculation.

On November 9, President Barack Obama, fresh off his victory over Republican presidential challenger Mitt Romney, held a press conference in which he declared a desire to leave federal income tax rates where they are except for high-income earners. Obama reiterated a call he made throughout the campaign to allow tax rates on those persons rise as scheduled at the start of 2013.

Earlier that day, House Speaker John Boehner (R-OH), held a press conference of his own, in which he proposed delaying the arrival of the fiscal cliff for another year. In the meantime, Congress and the president could seek a mutually agreeable long-term alternative.

According to a Nov. 9, 2012 article by Andrew Taylor, a reporter for The Associated Press who covered the press conference, “Boehner indicated that increasing the nation's borrowing authority, which was a divisive issue in August 2011 talks, should be part of any talks in the coming weeks on avoiding the fiscal cliff. The government has said the nation won't reach the debt limit until the spring.”

"’It's an issue that's going to have to be addressed, sooner rather than later,’" Taylor quoted Boehner as saying.

Boehner has also told reporters he may be more open to raising some taxes to help shrink the government’s budget deficits and constantly growing national debt burden.

‘Looking for Solutions’

Meanwhile, Senate Majority Leader Harry Reid (D-NV), in a November 7 press statement, said, “Now that the election is over, it's time to put politics aside, and work together to find solutions. The strategy of obstruction, gridlock, and delay was soundly rejected by the American people. Now, they are looking to us for solutions. We have big challenges facing us in the months ahead. Democrats and Republicans must come together, and show that we are up to the challenge.”

If the fiscal cliff goes into effect as scheduled, personal income tax bracket rates will climb from 10 to 15 percent, 25 to 28 percent, 28 to 31 percent, 33 to 36 percent, and 35 to 39.6 percent. Capital gains taxes would go from two brackets, one with a rate of 5 percent and the other of 15 percent, to three brackets with rates of 8, 10, and 20 percent, according to the nonpartisan Congressional Budget Office.

The current lower tax rates were designed to expire when Congress passed and Republican President George W. Bush signed temporary tax cuts into law. The tax rates would be reverting back to what they were immediately before Bush took office on January 20, 2001.

Social Security Tax Hike

Social Security tax rates also would rise from 4.2 to 6.2 percent for individuals, and from 10.4 to 12.4 percent for persons who are self-employed, according to the CBO. The Social Security tax cut was not enacted as part of the Bush-era cuts. It was done in 2010 under President Obama.

Estate taxes also are set to rise, from the current 35 percent rate with a $5 million exclusion, to the old 55 percent rate and $1 million exclusion. The alternative minimum tax “patch,” which has kept millions of persons from paying higher taxes, has already expired and would not be renewed.

In addition, a variety of tax increases as part of the Obamacare health insurance legislation are coming on line.

Spending cuts—the “sequester”—are the other part of the fiscal cliff. The sequester calls for automatic across-the-board cuts that would lop $1.2 trillion off of federal spending over 10 years.

Sequestration Is Bad’

Though many taxpayer advocacy groups favor spending cuts, some of them oppose the sequester. Ryan Alexander, president of Taxpayers for Common Sense, an advocacy group in Washington, DC, said in an October 1 statement, “Sequestration is bad. It is irresponsible. It would cut the best and the worst the government has to offer without distinction. And no amount of finger pointing can change the fact that both Congress and the President are responsible for this threat.”

The statement coincided with the release of the Taxpayers for Common Sense report, “Sliding Past Sequestration: Two trillion in common sense cuts to avoid the cliff,” which recommends spending cuts that could be achieved without hurting individuals or vital government services.

Pete Sepp, executive vice president of the National Taxpayers Union, a tax watchdog group based in Alexandria, Virginia, said, “All told, expiring tax provisions of various kinds, plus new taxes taking effect in 2013, amount to nearly five times more than the sequester, which will shave $109 billion from a federal budget of about $3.5 trillion [in the first year]. With this perspective, it's easier to see why, even from a Keynesian standpoint, taxes are the most worrisome part of the immediate picture. Families and businesses of all kinds will be hit with bigger bills—and, as a result, declining incomes, investments, and job opportunities—from the tax hikes. Indeed, Congress should allow the sequester spending cuts to take effect, and reduce the negative impact that federal borrowing can exert on the economy.”

Internet Info

“Sliding Past Sequestration: Two trillion in common sense cuts to avoid the cliff,” Taxpayers for Common Sense: http://heartland.org/policy-documents/sliding-past-sequestration-two-trillion-common-sense-cuts-avoid-cliff

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)