What the Fiscal Cliff Means for the Middle Class
by Kenneth Thomas
What the Fiscal Cliff Means for the Middle Class
Now that the election is over, it seems like all the politicians and pundits can talk about is the so-called “fiscal cliff.” But the chatter around the fiscal cliff is deeply weird, so in this post I will explain what it is and what the issues involved mean for the middle class.
Just what is the fiscal cliff? It is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws. Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country’s $15.29 trillion gross domestic product in 2011. Yes, that would mean a recession, with obvious consequences for the middle class. But this is only true if we did nothing after January 1, and that’s not going to happen.
To put it another way, $800 billion is a 72.7% cut in the government’s budget deficit for the just ended 2012 fiscal year. You would think this would make the people calling for an immediate cut in the deficit happy, but nooooo. Just the opposite, which is the weirdest aspect of the entire debate. I’ll come back to that in a minute; first, let’s look at the main components of the fiscal cliff.
The biggest chunk is $426 billion from the final expiration of the Bush tax cuts, according to a Bloomberg analysis in July. Of this, $358 billion is for the first $250,000 of all taxpayers’ earnings, and the remaining $68 billion is for the tax cuts for income above $250,000 ($200,000 for a single person) that President Obama wants to get rid of. Both Republicans and Democrats want to retain the tax break for 98% of households, but Republicans will try to hold it hostage to the cuts for the other 2%. Since the Bush tax cuts expire if nothing gets done (because they were originally passed through the Senate’s reconciliation procedure, which gave them a 10-year lifespan; then renewed for 2 years in 2010), on January 1 the Republicans will have no more leverage on this. Thus, I expect that the middle class tax cuts will be made permanent and, by early January at the latest, the $68 billion will be all that will have expired. Since the wealthy spend less of their income than do the middle class or poor, this tax increase will have little contractionary effect on the economy.
Another set of tax provision affecting couples with over $250,000 and individuals over $200,000 is contained in the Affordable Care Act. These folks will have to pay an extra 0.9% tax on earnings over the thresholds for Medicare, and an extra 3.8% on investment income, starting in 2013. According to an Associated Press estimate, this will raise $318 billion over 10 years, so we’ll call it $30 billion for 2013. Since this is part of the funding for Obamacare, the President is highly unlikely to budge on this. Again, as a tax hike on the top 2%, it will have relatively little contractionary effect.
There are $110 billion in automatic spending cuts scheduled in 2013 due to the so-called “sequester.” These were triggered last year when no deal was made on long-term deficit reduction. With unemployment still at 7.9%, government spending cuts are definitely harmful to the middle class. To the extent that the $55 billion cut from the defense budget comes from overseas spending, there will be little contractionary effect in this country. That is, if we closed a military base in Germany, it would have more of an effect there than here. In any event, since the United States spends 41% of the world’s total military expenditure,* we could afford to redirect quite a bit of this $711 billion annual expenditure (China is a very distant second at $143 billion) to other uses. Nation building at home, as the saying goes.
The other $55 billion would come from domestic discretionary spending, so the middle class would bear the full brunt of this. Of course, neither party wants to see “their” favorite budget items cut, so there is a good chance that these spending cuts will be delayed, which would be a good thing, though not as good as shifting some military spending into the domestic budget.
There’s more, of course, but the basic outline is clear: we are seeing a replay of last year’s debt ceiling “deal,” in which Republicans are trying to pass austerity measures the public does not support and did not vote for in the just concluded election. Indeed, a majority voted not just for a Democratic President and a Democratic Senate, but for a Democratic House of Representatives as well, with Republicans maintaining a majority only due to gerrymandering and compliant Republican courts. As Paul Krugman points out, the self-proclaimed “fiscal hawks” are tying themselves up in knots on why going over the cliff is bad when it achieves their goal of debt reduction. The answer, of course, is that they want to cut “low-priority spending,” by which they mean programs benefiting the middle class. As Linda Beale argues, the right course for Democrats is to do nothing until January, when the Bush tax cuts will be gone and we can pass tax cuts more targeted to the middle class as well as redirecting spending from our bloated military to domestic programs.
* Source: SIPRI (Stockholm International Peace Research Institute) Military Expenditure Database 2011, http://milexdata.sipri.org
http://middleclasspoliticaleconomist.blogspot.com/2012/11/what-fiscal-cliff-means-for-middle-class.html
Hi Ken:
The same day Krugman posted his comments on the supposed fiscal cliff, I was posting mine. http://www.angrybearblog.com/2012/11/by-run75441-little-patience-jefferson.html “Will the Reign of Witches end January 1st?”
“‘A little patience,’ Jefferson wrote, “and we shall see the reign of witches pass over, their spells dissolved, and the people recovering their true sight, restoring their government to its true principles. It is true, that in the meantime, we are suffering deeply in spirit, and incurring the horrors of a war, and long oppressions of enormous public debt. … If the game runs sometimes against us at home, we must have patience till luck turns, and then we shall have an opportunity of winning back the principles we have lost. For this is a game where principles are the stake.”
Not that it matters who was first in this posting on the fiscal cliff; but, I would like to think I was well attuned to even before Krugman.
Ken:
Bruce could probably attribute more to the Reign of Witches quote than I can; but in my limited knowledge, I will give it a crack. Early on in the life of the nation, there was much dissent and strife with sympathies towards the mother country during the wars with France and Britain. Washington threaded the needel between the factions and maintained his distance from European affairs.
Adams came to power as president believed the country faced grave danger from abroad and cane to pass The Sedition Act of 1798 by one vote in The House. It dealth with those who opposed and criticized the Federalists, roughly 1/2 of the country.
Jefferson as VP believed the Federalists exagerated the threats from abroad to take greater control or power than what the constitution allowed. The Sediton Act was used to prosecute those oppose the admiinistration and destroy their reputations. In his warning to the recipient of the letter from which the quote came, Jefferson was also afraid of prosecution.
Jefferson was afraid of the growing divide within the country as evidenced by MA and CN with their increasingly intolerant political interests of the rising mercantilists and those states more tolerant in the south and mid Atlantic such as Virginia. The views of the South at the time were more liberal, suspicious of government intrusion,opposed to a church-state, and more freindly to religious differences.
In which ase, he warns or cautions his friend that the reign of witches will soon pass with Adams leaving the presidency so be patient. The same as the Republican Party today, the Federalists over played their hand and are on a precipice boxing themselves into a corner which may break the back of their party if indeed President Obama drives off the theoretical cliff. The question would be afterwards, would the Republican oppose the President implementing the same tax breaks for the middle and lower class or 97% of the Household Taxpayers? If they did, it could lead to the destruction of thei party. The fiscal deficit cliff is only a threat if Congress does not take action after they go off the edge of it. Some of it will hurt; but, the sanity of government could be restored by removing the threat of contininuous and obstinate resistance to anything the President suggests. I do not believe the Republicans will cut their own throats by ignoring 97% of the nation to give advantage to a 3% minority when the nation is in danger. One other factor; “we the majority of the country are not for sale to please this minority.”
Doesn’t this really boil down to just going back to Clinton era tax rates and deficits? Let’s not forget the “rich” have already had their taxes raised by 3.8% on capital gains and .9% on Medicare taxes.
hancke
you may remember that Clinton era tax rates led to LOWER deficits.
meanwhile the percent tax raises really don’t add much to our understanding.
the rich can afford some tax raises, and if those raises are necessary to save the country they should be proud to do their patriotic duty.
the poor essentially have no money to pay taxes with. i am in favor of having them pay their own Social Security and Medicare. i am also in favor of having the middle class return to the Clinton level of taxes… that is rescind ALL of the Bush tax cuts,
and it makes me angry that the “left” piously calls for raising taxes on the rich while lowering their own taxes. i regard that as hypocrisy if not mental dis-hygiene. this does NOT mean that i support in any way the Republican view of taxes, or “the rich” in general. They add pure evil if not blatant insanity to the normal level of human blindness caused by self interest.
run
thanks for the history and general views re the present situation. i am going to disagree with you a bit. try not to take it personally.
my reading of the Adams administration is that it avoided a war and it may have preserved the country from a kind of French Revolution. I always thought the sedition acts were obviously unconstitutional, but i have learned over the years that the constitution is in the eye of the beholder, and have certainly felt at times that we need a sedition act to silence Fox News before they destroy the country. [don’t panic, i dont “quite” believe this.. but can certainly understand why someone might.]
as for the present situation, you may read my comment to hencke above re tax cuts for the middle class. but i don’t beleive Republican opposition to the President is the real problem. in the first place the President is not honest and he has in mind policies that will hurt the people (cutting Social Security). But in the second place, it’s not their opposition to the President that is wrong… if the President is wrong… it is the fact that they are willing to destroy the country to impose their ideology which is false to the point of insanity. obscene insanity.
if they were “president” i would regard it as high patriotism to oppose them in any and every way possible.
including of course violating any sedition acts as they might impose.