After reading posts and comments on sites like Zero Hedge where he hangs out, my husband sums up the message about the fiscal cliff, the debt ceiling, and the Grand Bargain this way:  We're going to get either tax hikes combined with spending cuts if there's no deal, or we're going to get tax hikes alone if there is a deal.  If the sequester takes effect, we won't like the composition of the spending cuts, but we're not going to get a better composition out of this crowd.

My bet is a cave, a deal, and tax hikes without spending cuts; at most there will be vaporous promises of future decelerations in increased spending.  The tax hikes will be narrowly targeted and therefore will generate negligible revenue in comparison with the deficit, so we won't so much raise the debt ceiling as (in Mark Steyn's phrase) lower the debt abyss.  "We can't cut our way to prosperity," the President informs us, but apparently we can borrow our way there.  Well, the press will eat up anything that smells of hands across the aisle, and the voters don't care about the military unless it's handing out water bottles after a storm.

Which reminds me of another comment my husband ran into, musing on Mayor Bloomberg's volte-face on the idea of clean-up support from those violent military types that he previously didn't welcome in his pristinely unarmed streets:  "You have reached the military.  Your call is very important to us.  Please pay attention, as some of our menu options have changed. . . ."

Forgotten exactly how the sequester works?  It was enacted as the Budget Control Act in August 2011, and consists of a deal to trade certain future spending cuts for a $2.1 trillion deepening of the debt abyss.  The cuts come in two parts.  First, there are $1 trillion in mandatory spending reductions, not contingent on any potential deal, in the form of caps on non-entitlement discretionary spending over the nine-year period from 2013 through 2021.  Second there is the sequester itself, which was intended primarily as a "sword of Damocles" to induce the Super-committee to reach an alternative deal, and which took effect when the Super-committee failed to do so in November 2011.  The sequester consists of $1.2 trillion in cuts spread out evenly over the same nine-year period, including $109 billion in 2013.  (Note that all these "cuts," as usual, are not to the current spending amounts but to the projected increased spending over the next decade.  Even if the sequester takes effect, the federal deficit is projected to increase over the ten-year period covered by the Budget Control Act, and the increase is projected to exceed the rate of growth of the economy.)

The sequester cuts are evenly divided between non-war military spending and non-entitlement discretionary domestic spending.  For 2013, therefore, there would be roughly $55 billion in cuts to each of defense and domestic spending.  Affected programs are projected to be cut by between 7.6% and 9.6%, except for Medicare reimbursements, which will be cut at a lower 2% level.  Included in what lawmakers call the "non-discretionary" cuts on the domestic side of the equation are $11 billion in Medicare reimbursements and a total of $5.2 billion in a hodge-podge of other non-discretionary programs, the largest of which is farm price supports, but which also include student loans, vocational rehabilitation, mineral leasing payments, and the Social Services Block Grant.  The other $38.5 billion will be cut from "discretionary" domestic programs, not including veterans' health benefits (which apparently are considered "domestic" rather than "defense") and Pell grants, both of which are mostly exempt.

The sequester deal received broad bipartisan support in 2011:   it passed by 268 to 161 in the House, opposed by about one-third of Republicans and half of Democrats.  It passed by 74 to 26 in the Senate, opposed by 19 Republicans and 6 Democrats.  The sequester can be avoided if lawmakers reach a deal to achieve $1.2 trillion in deficit reductions through other means.

We're going to bump up against the debt ceiling again at the end of this year, and of course the Bush tax cuts are set to expire then as well.  It is the combination of the expiration of virtually every tax cut enacted since 2001, the imposition of new Obama-era taxes, and the imposition of spending cuts mandated by the Budget Control Act (including the sequester) that is generally referred to as "the fiscal cliff."  Here is a summary of the tax changes automatically set for the end of this year:
1. Bush-Era Tax Cuts:  this includes the return of the current 10/15/25/28/33/35% individual tax rate brackets to the pre-2001 rates of 15/28/31/36/39.6%, the return of the tax-rate on long term capital gains and qualified dividends from 15% to 20% and 39.6%, respectively, and the return of the limitation on itemized deductions and phase out of personal exemptions.

2. Obama-Era Tax Cuts:  on January 1, 2013, several provisions that benefit the lower classes — most notably the increased child tax and earned income credits and the expanded education credits — are slated to expire.

3. The Estate Tax:  the estate tax exemption and tax rate are currently at $5,120,000 and 35%, respectively.  Come January, they will return to $1,000,000 and 55%.

4. Expiration of the AMT Patch: The most recent patch raised the AMT [alternative minimum tax] exemption for 2010 and 2011 from $45,000 to $74,450 for MFJ. In 2013, this will reset to $45,000, pulling tens of millions of taxpayers into AMT.

5. Temporary Payroll Tax Cut:  For 2011 and 2012, the employee’s share of Social Security tax was cut from 6.2% to 4.2%.  This rate cut expires at year end.

6. Obamacare Taxes:  Starting in 2013, taxpayers earning more than $250,000 will pay an additional 0.9% tax on their wages and 3.8% on their unearned income (interest, dividends, capital gains.)

7. Extenders:  There are a host of provisions set to expire at year end that regularly do so, before Congress retroactively resuscitates them.  Foremost among the “extender” provisions are the R&D credit and the personal deduction for state and local income taxes.


Grim said...

For those of you reading along with the Politics, there's that "unearned income" concept we were talking about. It's something that people still believe enough to use it uncritically in law.

Joseph W. said...

And what a shame - their pension funds investing in all that "unearned" income lose because someone's mental model treats it that way. (As when the stocks they hold pay less in dividends, because dividends are double-taxed, and so discouraged.) A workers' pension fund that buys corporate bonds is, after all, one of those despicable usurers that Aristotle complained about, performing "unnatural" acts that were never meant to be...

It would be better if the government treated "earned" versus "unearned" income as "none of its business." But that won't happen anytime soon.

Mind you, as the expenditures and debt rise, the tax options only get worse...and the especially pernicious tax of inflation promises to return. To paraphrase Hannibal, I wonder more it hasn't arrived already than I seriously doubt its coming. (Given what gold prices have done in recent years, I suspect I am not alone in this.) I'd rather see a partial default a la Alexander Hamilton than that, but I doubt we'll see anything so honest.

Grim said...

Yeah, inflation has been a question of when and not whether for a long time. But of course, if you count food and energy, it's been here for quite a while.

Texan99 said...

Oh, the list of things we'd be better about if the government treated them as "none of its business." As a species, we are a bunch of irresponsible busybodies, meddling in everyone else's business and neglecting our own.

bthun said...

Beginning with what Joseph said at 9:00 pm, then reading on through what Grim and Tex said, I can but sit, nod my head, look at last month's statements on my investments and... Well, men don't cry, --save when giving away their daughters at the alter-- so I'll be anxiously watching for 17:00 hours so I might at least start the Hun's beer ritual. A tradition of dry-eyed beer swilling at the Hun hovel since January 20, 1977.