Budget Control Act 2011

America, and its problems, make it hard to love

Posted on by j.giglio

The United States is a hard country to love right now. Economic growth has been anemic, too many Americans are looking for work, others are watching their real incomes fall, and the middle class is seeing its purchasing power decline. Income inequality is at historic highs; the ever-widening gap between low wage earners and the few who earn millions has been amply documented.

And if you pay even the slightest attention to the news, between now and the end of the year you will hear the term “fiscal cliff’ until you are numb. The term describes several big events set to occur at the end of this year. But even an agreement to keep us from heading over the cliff won’t do anything about the worst problems plaguing our country.

The end-of-year events include expiration of the Bush-era tax cuts- including current lower tax rates on capital gains, dividends, income and estates- and of stimulus measures, such as the payroll tax cut and extended unemployment benefits. Taken together, more than $600 billion of automatic spending cuts  and tax increases will take place if the President and Congress fail to reach a deal before the end of the year.

Spending cuts are scheduled to kick in automatically in January 2013 as a result of the deficit reduction super committee’s 2011 failure to reach agreement. To make matters worse, the nation’s $16.4 trillion debt limit will once again need to be raised early next year.

Failure to find a broad, bipartisan plan to address these issues would throw the economy back into deep recession. The Congressional Budget Office, expressing concern, edged with panic, says that falling off the fiscal cliff will result in gross domestic product falling by 4 percent. With an economy that is only growing about 2 percent annually, a 4 percent cut is nothing to sneeze at. The economy will start down a slope that will lead to a jump in unemployment, increase income and wealth inequalities, and increase  the already record number of Americans living in poverty.

With that in mind, the President has been meeting with Congressional, business and labor leaders to develop a consensus over the fiscal impasse and avoid the fiscal cliff.

The short story is that the President wants to raise marginal tax rates on high earners, those Americans making an annual salary of $200,000 or couples bringing in $250,000, and close loopholes. Speaker John Boehner has said he is open to more tax revenues, but not from higher tax rates. He wants to close loopholes and make serious spending cuts. Who knows, maybe they’ll even consider Mitt Romney’s proposal to limit income tax deductions.

We have seen this play before where politicians regale us with lots of rosy rhetoric. In 2011, those same politicians could not reach an agreement to raise the debt ceiling without a broader agreement to cut the deficit and put our fiscal house in order.

So they agreed on the Budget Control Act of 2011, extending the Bush era tax cuts that were due to expire Jan. 1, 2012 and generally kicking the can down the road. The result was the loss of our AAA bond rating with one of the credit rating agencies. If dysfunctional behavior were a crime, American prisons would be overflowing with elected officials.

The President has a strong hand despite the Republican control of the House of Representatives. He can allow the Bush-era tax cuts to expire, the marginal tax rate on ordinary income to increase to 39.6 percent and the maximum capital gains tax rate to rise to 20 percent at the end of the year.

He can then tum around and propose cutting taxes for those earning less than $200,000. After all, raising taxes on high earners was a cornerstone of the President ‘s campaign, and Republicans in Congress are unlikely to vote against tax cuts.

One thing is certain: even though a majority of Americans want their benefits left untouched, they will have to endure cuts in popular expenditures like defense and entitlement programs.

Ad hoc solutions may address the debt and deficit problems, but they don’t do anything about unemployment, wage stagnation and narrowing the gap between winners and losers in American society. Until those problems are addressed, the United States will remain a tough country to love.

originally published: November 24, 2012

The biggest tax increase in American history

Posted on by j.giglio

Unless you have been away from planet Earth for the past two years, you know that under the Budget Control Act of 2011, many of the tax breaks established during President George W. Bush’s administration are set to expire on Dec. 31.

The act, passed in 2011 after Republicans and Democrats failed to come to an agreement over raising the nation’s debt ceiling, was intended to achieve $1.2 trillion in savings with automatic spending cuts of about $110 billion mandated each year for the next 10 years. The law is the latest blow back from the White House and Congress’ inability to deal with our fiscal and economic problems.

In addition, new Medicare related taxes are scheduled to take effect for those in higher income brackets in 2013, and the payroll tax holiday is set to expire at the end of the year. In total, the changes could amount to the biggest tax increase in American history.

Federal Reserve Chairman Ben Bernanke calls it “a massive fiscal cliff’ and the media have dubbed it “taxmageddon.”

If the Bush tax cuts are allowed to expire, the maximum capital gains tax rate will increase to 20 percent, while the maximum rate on ordinary income will jump to 39.6 percent. The next day a fiscal discipline known as sequestration will cut about $110 billion a year from federal programs.

Payroll tax rates, which were cut as a temporary stimulus in 2011 and 2012, will increase from 4.2 percent on wages up to $110,000 to 6.2 percent. After these cuts expire, Americans earning around $50,000 annually can expect to pay about $80 more in monthly taxes.

Some estimate that the average American can expect to pay about $3,500 more as a result of all the tax cuts due to expire while we are singing Auld Lang Syne. This is not the way to jump start consumer spending.

But wait, there’s more. Under the Affordable Care Act, starting in 2013 high income individuals with a modified adjusted gross income above $200,000 or married joint filers with a modified adjusted gross income above $250,000 will pay an additional 3.8 percent tax on net investment income, such as most long-term capital gains, interest (excluding municipal bond interest), and dividends that exceed those threshold amounts. This will greatly inconvenience the one percenters.

Taken together, it makes for a grotesque austerity program, especially when stagnant wages and high unemployment continue to plague low- and middle-income families working hard to make ends meet.

If all the provisions that make up the fiscal cliff come to pass, it would trim some 4 percent from the economy’s already paltry growth rate.

Between now and the end of the year, we will be entertained by both parties’ posturing as compromises are discussed to avoid the cliff. It will all sound good, but the litmus tests should be whether they do harm to the middle class and exacerbate the nation’s rising income inequality.

The top one percent of American society captured more than half of the income gains from 1993 to 2008. In 2010, the first full year of the so-called economic recovery, they captured 93 percent of all economic gains.

This inequality is more than a fairness issue; it is holding back economic growth by restraining consumer spending, one of the driving forces in our economy.

An agreement to avoid the fiscal cliff is possible, but a more likely scenario is that we will witness another master class in buying time and kicking the can down the road. These issues have been marinating for years and it is naive to expect that a presidential election can change our dysfunctional federal government.

So for all the happy talk we’re likely to hear about the fiscal cliff, the actual response to it is likely to be somewhere between a punt and a bunt. And that would be bad news for all of us.

originally published: November 17, 2012