Should We Go Off the Cliff: The Rationale

Many economists and others believe that we should do only
the things we must to avoid sequestration and that we should raise taxes on the
wealthy and we should deal with some of the tax loopholes and raise the debt
ceiling, but we really need to do more right away in stimulating growth in the
economy through doing what is necessary to make more jobs available, more jobs
that pay a living wage and have a path to advancement, and we need to tackle
infrastructure and education.

From Huffington Post:

So, the big takeaway is that we should never do this
Should we trust Congress when they say they will meet in a committee
to draw up substantial spending cuts? Going forward, it’s going to be hard to
do so. The good news, however, is that if we can avoid the nonsensical level of
fiscal austerity that the sequestration is threatening, Congress can start work
on a more critical, near-term project that I like to call “ameliorating
the negative effects of that gigantic financial collapse that happened four
years ago.” Getting the long-term budget trajectory in line is something
that can be safely put off until after we’ve solved the unemployment and
foreclosure crisis, and we’ll have already gotten a good head-start on that
once the Clinton-era tax rate levels on upper-income earners are restored. This
is what the American people want Congress to do anyway — as usual, they
do not give a tinned turd about the deficit.

Jason Linkins, author

From The Examiner:

“In August 2011,
bipartisan majorities in both the House and Senate voted for the threat
of sequestration as a mechanism to force Congress to act on further deficit
reduction. The specter of harmful across-the-board cuts to defense and
nondefense programs was intended to drive both sides to compromise. The
sequestration itself was never intended to be implemented. The Administration
strongly believes that sequestration is bad policy, and that Congress can and
should take action to avoid it by passing a comprehensive and balanced deficit
reduction package.

As the Administration has made clear, no
amount of planning can mitigate the effect of these cuts. Sequestration is a
blunt and indiscriminate instrument. It is not the responsible way for our
Nation to achieve deficit reduction. The President has already presented two
proposals for balanced and comprehensive deficit reduction. It is time for
Congress to act. Members of Congress should work together to produce a balanced
plan that achieves at least the level of deficit reduction agreed to in the BCA
that the President can sign to avoid sequestration.”

When it comes to
non-defense spending cuts, they will be wide-spread as the law requires.
Medicare will be cut 2% which is the maximum the law allows Medicare to be cut.
Other mandatory qualification-based domestic programs like Medicaid, Food
Stamps, etc will be cut 7.6%.

Domestic discretionary programs such as
scientific grants and Education Department programs will be subject to 8.2%
cuts across the board. Congress and the White House also get their budgets cut.
Pell grants, food safety, the FAA, FEMA, farm programs also get cut 8.2%. These
cuts will hit nearly every agency of government.

Most people when asked
are for spending cuts at least until the cuts affect a program they like or
use. Then, the attitude changes. Cut everything else, leave my program alone.”
When everyone says that, nothing gets cut. That is why we have the debt.

The problem with this
plan, however, is two-fold. First, the cuts are not strategic. They are not
based on the cost-effectiveness of a program. They are across the board.

Secondly, economists
warn that austerity at this point in the recovery would cut GDP, slow the
recovery, or perhaps send us back into recession. An average cut of 8.2% in
federal salaries alone will mean tremendous layoffs. So will cuts by defense
contractors. That will raise the unemployment rate, hurt consumer spending, stifle
small business, and throw ice on the recovery.

Despite the severity
of the problem, nothing will happen until after the election—if then.

Meanwhile, taxpayers are paying the salaries,
expenses, and medical plans for Congress to do-nothing.

From The New York Times for November 26th, 2012
here is what Paul Krugman has to say:

But the
deficit scolds aren’t giving up. Now yet another organization, Fix the Debt, is
campaigning for cuts to Social Security and Medicare, even while making lower
tax rates a “core principle.” That last part makes no sense in terms of the
group’s ostensible mission, but makes perfect sense if you look at the array of
big corporations, from Goldman Sachs to the
UnitedHealth Group
, that are involved in the effort and would benefit from tax cuts.
Hey, sacrifice is for the little people.

So should
we take this latest push seriously? No — and not just because these people,
aside from exhibiting a lot of hypocrisy, have been wrong about everything so
far. The truth is that at a fundamental level the crisis story they’re trying
to sell doesn’t make sense.

heard the story many times: Supposedly, any day now investors will lose faith
in America’s ability to come to grips with its budget failures. When they do,
there will be a run on Treasury bonds, interest rates will spike, and the U.S.
economy will plunge back into recession.

This sounds plausible to
many people, because it’s roughly speaking what happened to Greece. But we’re
not Greece, and it’s almost impossible to see how this could actually happen to
a country in our situation.

He has
more to say. You can find his article at this link:

I think many of us are perplexed by the complexity of the issues involved in dealing with all of these things at one time:  decide what to do about taxes, decide what to do about budget cuts, decide what to do about the debt, decide what to do about the deficit, decide what to do about tax loopholes, decide whether or not to simplify the tax code, decide how best to stimulate job growth, decide what to do about “entitlements”, and make sure we keep inflation low while we tackle and solve all these issues. Solve them? That could take several lifetimes. Pick a direction and see how it works while keeping in mind that we may have to try something else? That’s probably more like it. Why are we trying to accomplish all of these things at once. 
Let’s deal with one or two things at a time. Raise the debt ceiling and raise top tax rates. Just do it! Make some careful cuts but leave “entitlements” alone for now. Tackle education and infrastructure to help grow jobs, but make sure to chose projects that really will help. In terms of education spend money to train people for those jobs that are going unfilled. In terms of infrastructure look at how to get the most bang for our buck. What parts of our infrastructure will help jobs or trade or business. If we have solved the problem of the water resources in Nebraska build that Keystone Pipeline the Republicans want so much. Then make some more cuts and begin work on “entitlements” only if necessary.
Doing this all of the things we need to do at one time is huge and it is like trying to straighten out a giant pretzel. Oh, but I forgot, the whole idea is just to obfuscate the process by focusing everywhere but the taking care of budget business. We may have to take to the streets on this one. Get your signs ready!   (My view represents the view from the cheap seats.) 





Should We Go Over the Cliff: The Numbers

What does sequestration mean in terms of cuts – how much and
to whom?

$900 billion in cuts in discretionary programs
over the next decade

Would impose further automatic across-the-board
spending cuts in many programs, unless Congress enacts an additional 1.2 trillion
in deficit-reduction measures by Jan. 15, 2012

Would take effect in Jan., 2012

9% annual cuts in non-defense programs

9% cuts in defense programs for each year from

New Budget Control Act which implements the debt
limit deal

Raises debt limit by 2.1 trillion in steps

Establishes binding “caps” on annual
appropriation bills covering non-entitlement spending – e.g. defense,
education, National Parks, FBI, EPA, low-income housing assistance, medical
research, etc.

Requires Congress to vote on balanced budget
amendment this fall

Establishes a Joint Select Committee to draft,
vote on by Nov. 23rd and report by Dec. 2nd this year – definite
reductions through 2021 beyond the $900 billion – if they fail that will touch
off automatic cuts known as sequestration

Cut 54.7 billion from defense each year from

Cut 54.7 billion from non-defense programs each
year from 2013-2021 from both mandatory (entitlements) and discretionary

Mandatory cuts:

Cuts Medicare payments to providers and insurance
plans (limited to 2%)

5.2 billion to other mandatory programs like
farm price supports

Social Security, Medicaid, CHIP, SNAP (food
stamps), child nutrition, SSI, refundable tax credits, like Earned Income Tax
Credit, veterans benefits and federal retirement are exempt from sequestration

That leaves 38.6 billion in non-defense cuts which would
come from

Across-the-board cuts for discretionary programs
except Veteran’s Medical Care and Pell Grants

2014 – 2021 – reduction in statutory caps on
total funding

I guess what I didn’t realize that these cuts would happen
every year for 10 years, although years 2-10 would be configured in a different way. Yikes!









Taxes By Income If We Go Off the Cliff

Who will be affected if a budget deal is not reached and
how? The Wall Street Journal published some interesting data in answer to this
question on Wednesday, November 21, 2012 in its print edition. Of course the
WSJ skews conservative Republican, but they also are our financial race track
sheet for stocks, bonds, and commodities, so, hopefully, we can trust them to
give numeric data that is not too skewed.

In this chart WSJ shows what % of tax increases, and
therefore of the fiscal burden, would affect which group of American tax

They also give us some concrete examples:

First:  A higher-income working couple  (if Bush tax cuts disappear and if AMT relief
goes away and investments get hit by higher rates in dividends and capital

Income Example: $350,000

Federal tax change in dollars: $13,847, 20.3% tax change,
29% tax rate, 4.9 points up


Second:  A Single Unemployed person (will have some of
the largest tax increases with loss of benefits for working poor being a big

Income Example: $10,000

Federal tax change in dollars: $159, 55.5% tax change, 8.4%
tax rate, 3.0 points up


Third:  Lower income working couple

Income Example: $25,000

Federal tax change in dollars: $1,423 (previously this group
got a $15 refund), 5.5% tax rate, 5.6 points up


Fourth:  Higher Income Professional (will lose
protection from Alternative Minimum Tax)

Income Example: $150,000

Federal tax change in dollars: $6,662, 24.5% tax change,
24.5 tax rate, 5.0 points up


Fifth:  College Student (will lose education breaks,
payroll tax holiday)

Income Example: $15,000

Federal tax change in dollars: $308, 37.9% tax change, 7.5%
tax rate, 2 points up


Sixth:  Retiree Household (will lose Bush-era tax

Income Example: $35,000

Federal tax change in dollars: $540, 42.4% tax change, 5.1%
tax rate, 1.5 points up


Seventh:  Very High Income Household (their federal tax
bill would rise, yet share of overall federal tax would go down because the
impact of the fiscal cliff on lower earners would be so great)

Income Example: $1 million or more

Federal tax change in dollars: $254,637, 24.2% tax change,
39.7% tax rate, 7.7 points up


You will have to judge for yourself whether, based on this
information, you will be able to survive if you personally are taken over the
fiscal cliff.