# Fiscal cliff - could be worse

by Astronuc
Tags: cliff, fiscal, worse
 PF Patron P: 2,949 With regards to the deficit, the CBO calculates the i) sequester from Budget Control Act and ii) the scheduled across the board tax increase, together, would cut the deficit by $607B, or less than half of the current 2012 deficit,$1.33T. The $607B figure is a static analysis, assuming no change to economic output from the tax increase/BCA. CBO expected economic slow down effects retard the deficit the reduction. The tax increases are responsible for$399B of the $607B. http://www.cbo.gov/sites/default/fil...estraint_0.pdf P: 18  Quote by ParticleGrl Since no one has explicitly mentioned it- the fiscal cliff is just a big reduction in the deficit due to what would amount to a massive austerity program like the UK (tax hikes+spending cuts). So people who have been harping about the deficit SHOULD NOT be complaining about this. If you think the deficit is a major problem, congrats, this could solve it. I care about the deficit, but I don't know if spending cuts are really the answer. I mean the major gobblers of the budget are Social Security, Medicare, Medicaid, and national defense. Maybe I am totally wrong, but is it even possible to really make any significant spending cuts to these things? Maybe we can get a balanced budget again with a healthy economy, but if not, I think some tax increases, unfortunately, will be needed. The idea of the "fiscal cliff" spending cuts was to make them so severe that the government would HAVE to come to an agreement. The so-called "supercommittee" failed on this. And Secretary of Defense Panetta has said that such cuts would be devastating to the military. One I was curious about was maybe eliminating the payroll tax cap and just turn SS into a form of social welfare program? The payroll tax is what pays for SS-Medicare-Medicaid, so I'd imagine if we could bring in a lot more revenue, that would go a huge amount towards closing the deficit. However, eliminating it would mean hitting a lot of middle-class people, albeit upper-middle-class (those making over$106,800 are in the upper brackets of income, but definitely not rich either). Some have proposed a "donut hole," where you cap it on income from $106,800 up to$250K and then remove the cap for incomes above $250K, but I don't know if that would be enough to bring in any sizeable amount of revenue or just be more of a "feel-good" policy. Another proposal is eliminating the Bush tax cuts, all of them, but that again means "raising" taxes on the middle-class and thus wouldn't go over well politically unfortunately and I don't know how much additional revenue that would generate. I would be against implementing a VAT ("Value-Added" Tax), because the government would probably just end up spending more and more of the money and just raising it more and more over time. I am a very strong believer in sound safety nets, and I just don't know if it's realistic to think we can cut spending to fix the budget problems, but if there are sound ways to do it, I am all ears. I do think certain programs could use some reform in order to make them more sustainable for the long-term, however.  Now, in reality, this could stall the recovery quite a bit- but its not actually a cliff, and its certainly not a "systemic weakness" decades in the making. All spending cuts means you are going to fire people, whether public or private sector. Firing people when the economy is weak clearly makes it weaker- but the good news is, borrowing costs are low, so we have no need to cut. Any competent business man will tell you, when real interest rates are below 0, you lever up. Yeah, but the problem is if you level up and then the interest rates shoot up for some reason and then it takes a lot more money to service the debt. PF Patron P: 691 A Wasington Post article yesterday, both surprised me and didn't surprise me. When Bush took office, we were paying down the debt. This wasn't surprising to me.  The cliff is packed with such quandaries. On the tax side, most date to the start of the George W. Bush administration, when the budget was in surplus and the nation was paying down its debt for the first time in a generation. Bush took office on a promise to return the surplus to the taxpayers. However, I didn't realize that so much of the 2013 fiscal cliff was due to the expiration of those same tax cuts.  All told, expiring tax breaks account for nearly four-fifths of the$500 billion the cliff is projected to suck out of the economy between January and September. Automatic budget cuts, known as the sequester, are almost an afterthought. According to the nonpartisan Congressional Budget Office, they amount to \$65 billion in the fiscal year that ends in September, evenly split between the Pentagon and domestic programs.
It reminds me very much of people who rack up massive credit card debt with purchases that they can't afford and then whine when the bill comes due. And, just like the individual debtor who treats themselves to yet another shopping trip, night out, etc. to make themselves feel better over their debt, I expect that we will see another feel good program from the government that will accomplish nothing with respect to actually reducing the deficit. Of course it will be wrapped in the name of "stimulating the economy".
Mentor
P: 21,652
 Quote by CAC1001 I care about the deficit, but I don't know if spending cuts are really the answer. I mean the major gobblers of the budget are Social Security, Medicare, Medicaid, and national defense. Maybe I am totally wrong, but is it even possible to really make any significant spending cuts to these things?
1. Those things are supposed to be separate pots of money from the general fund. Though they are sometimes looted, their deficits/debts are counted separately.

2. What does "is it even possible" mean? We can do whatever we want. We could cancel the programs tomorrow if we wanted to. What is done is all a matter of political popularity.

Obama gave a speech on Friday saying that the most important thing he wants to do is to raise taxes on the rich, while implying, falsely, that Republicans want to raise taxes on the middle class but not the rich. He gave little indication of wanting to deal with spending issues or fixing those broken entitlement programs, which are a priority for Republicans. Sounds to me like he's still in campaign mode. Here's the transcript: http://www.washingtonpost.com/politi...4_story_1.html

At this point, my preference would be for the Republicans to hold firm on the taxes, which would put Obama in a compromise-or-let-all-the-tax-cuts-expire position. It would also provide an easy out for Republicans who signed Grover Norquest's pledge and gives Republicans big campaign fodder for next time by making Obama one of the biggest tax raisers in history.....which is why Obama would (an probably will) probably cave if pressed, just like last time.

But either way, we'll get to find out soon if Obama is going to use the fact that he doesn't have to run for election ever again as a reason to start making necessary but unpopular changes, or if he's just going to continue to make decisions based on how they will impact his approval rating. For that matter, the Keystone pipeline is back on the table too....and I'd like to see him actually make a policy on nuclear power rather than just bury the issue. Perhaps a separate thread for such wishlists/predictions...?
P: 5,416
 Quote by russ_watters At this point, my preference would be for the Republicans to hold firm on the taxes, which would put Obama in a compromise-or-let-all-the-tax-cuts-expire position. It would also provide an easy out for Republicans who signed Grover Norquest's pledge and gives Republicans big campaign fodder for next time by making Obama one of the biggest tax raisers in history.....which is why Obama would (an probably will) probably cave if pressed, just like last time.
Apparently one of Romney's advisors has just changed his mind about Republican tax policy:
http://www.huffingtonpost.com/2012/1...n_2124160.html
http://www.ft.com/cms/s/2/66564c38-2...#axzz2C90skast
 Quote by Glenn Hubbard, in FT So given these three points, what should those negotiating the fiscal cliff do? The first step is to raise average (not marginal) tax rates on upper-income taxpayers....
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P: 21,652
"....Contradicting Entire Romney Campaign"? Really? Exaggerate much?

Starting with a bad title and moving on from there, the article is highly misleading -- it's basically just an opportunity to take a final pot-shot at Romney. So it is understandable that your paraphrase would also be misleading, but that doesn't make it right. In particular:
 On tax policy, Romney rejected increasing taxes on the wealthy, and in fact offered a plan to cut their tax rates. Only after the election did Hubbard state that his own reasonable, evidence-oriented views contradicted those of the candidate he was advising.
The HP article is switching back and forth between marginal and average rates. No one in the campaign on either side discussed average tax rates. So while they don't exactly align, it is incorrect to say that even on this narrow piece of the issue, they are opposites.

Both, for example, would extend the Bush Tax Cuts indefinitely. Where they differ is on the nature of the changes in deductions.

And:
 While Hubbard endorsed raising tax rates on the wealthy, he also pushed back against a campaign theme of President Barack Obama, suggesting that American fiscal woes cannot be remedied by increasing the burden on the wealthy alone.
Right. So on that issue, Hubbard and Romney are pretty closely aligned. Not contradicting.
 P: 2,162 Dems: Hey Reps, compromise with us. Reps: Sure, no problem. However, no tax increase. Dems: What are you talking about? That's the issue you need to compromise on. Reps: No can do, we signed a pledge. Dems: No compromise, fiscal cliff. Fiscal cliff, tax increase. Your move.
PF Patron
P: 1,739
 Quote by russ_watters "....Contradicting Entire Romney Campaign"? Really? Exaggerate much? Starting with a bad title and moving on from there, the article is highly misleading -- it's basically just an opportunity to take a final pot-shot at Romney. So it is understandable that your paraphrase would also be misleading, but that doesn't make it right. In particular: The HP article is switching back and forth between marginal and average rates. No one in the campaign on either side discussed average tax rates. So while they don't exactly align, it is incorrect to say that even on this narrow piece of the issue, they are opposites. Both, for example, would extend the Bush Tax Cuts indefinitely. Where they differ is on the nature of the changes in deductions. And: Right. So on that issue, Hubbard and Romney are pretty closely aligned. Not contradicting.
It is neither a “final pot shot” nor an “exaggeration” to describe the obvious contradiction between Romney’s campaign statements and Hubbard’s statement. Please see the final paragraph below.

“As the GOP candidate for president, Romney called for capping government spending at 20 percent of gross domestic product, without detailing what programs should be cut, or by what amounts. When asked during the first presidential debate about what spending he would target, Romney suggested eliminating funding for PBS -- money which amounts to far less than 1 percent of the federal budget deficit.

"What should those negotiating the fiscal cliff do?" Hubbard wrote. "The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should first come from these individuals. This means closing loopholes ... Republicans cannot argue for low tax rates without being clear about where [spending] cuts must come from."

On tax policy, Romney rejected increasing taxes on the wealthy, and in fact offered a plan to cut their tax rates. Only after the election did Hubbard state that his own reasonable, evidence-oriented views contradicted those of the candidate he was advising.”
http://www.huffingtonpost.com/2012/1...n_2124160.html

Cheers,
Bobbywhy
 Mentor P: 21,652 Just repeating it doesn't make it not an exaggeration or eliminate the errors.
P: 18
 Quote by russ_watters 2. What does "is it even possible" mean? We can do whatever we want. We could cancel the programs tomorrow if we wanted to. What is done is all a matter of political popularity.
By "even possible," I mean, since those programs are going to remain around as people want them, is it even possible to actually make any sizeable cuts to them without correspondingly large cuts in their services.
Mentor
P: 21,652
 Quote by CAC1001 By "even possible," I mean, since those programs are going to remain around as people want them, is it even possible to actually make any sizeable cuts to them without correspondingly large cuts in their services.
Isn't that a tautology? Cutting funding to a program means cutting the services it provides.
P: 18
 Quote by russ_watters Isn't that a tautology? Cutting funding to a program means cutting the services it provides.
Well the way the Republicans talk, it seems to go like this: "We need to make sizeable spending cuts, but we promise we are NOT going to cut people's Social Security and Medicare. And defense cannot be cut either."
HW Helper
P: 2,270
 Quote by Bobbywhy "What should those negotiating the fiscal cliff do?" Hubbard wrote. "The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should first come from these individuals. This means closing loopholes ... Republicans cannot argue for low tax rates without being clear about where [spending] cuts must come from."
This isn't actually a contradiction. It does raise questions.

The average tax rate is more important than the marginal tax rate when it comes to raising revenue. So is raising average tax rates on the rich by closing loopholes, while leaving marginal rates the same, a way to weasel out of promises to never raise tax rates? Or is it a way to raise average tax rates on everyone while keeping their promise not to raise tax rates on anyone? If the result is the same, what's the advantage of closing loopholes instead of just raising the marginal tax rates?

And, most importantly, if a compromise is to be reached, who should Obama be negotiating with - John Boehner or Grover Norquist? Which one controls Republicans in the House? Or does anyone control the Tea Party wing of House Republicans?

It has to be frustrating to be House Majority Leader, but not actually control a majority in the House.
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 Quote by Astronuc This would seem to indicate a systemic weakness in the US economy, a weakness that has been developing for some time - like two or three decades.
The cliff refers to taxes rates that rise on a given day, Jan 1, and spending cuts below plan that begin on the same day. How is that event characterized as systemic, or developed over decades?
PF Patron
P: 2,949
 Quote by Jimmy Snyder Dems: Hey Reps, compromise with us. Reps: Sure, no problem. However, no tax increase. Dems: What are you talking about? That's the issue you need to compromise on. Reps: No can do, we signed a pledge. Dems: No compromise, fiscal cliff. Fiscal cliff, tax increase. Your move.
Interestingly, the problem of the pledge goes away if taxes go up across the board. After January 1, the only income tax rate move on either side is a reduction, the details being to whom and how much.

Unfortunately I suspect many of the lawyers and lobbyists will be for going over the cliff, as then they have advantage to gain on behalf of their clients by cutting out selective breaks.
P: 152
 who should Obama be negotiating with - John Boehner or Grover Norquist?
The current House Majority Leader is Republican Eric Cantor, while the current House Minority Leader is Democrat Nancy Pelosi.

Since 1995, the only Majority Leader to become Speaker is John Boehner,

I'm lost here. ... what?

Who is this lobbyist Norquist? I don't understand why this person has any say in anything.
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P: 21,652
 Quote by CAC1001 Well the way the Republicans talk, it seems to go like this: "We need to make sizeable spending cuts, but we promise we are NOT going to cut people's Social Security and Medicare.
You misunderstand: Repubs promise not to make changes for CURRENT SENIORS. Dems want to make no changes at all.
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P: 21,652
 Quote by mheslep The cliff refers to taxes rates that rise on a given day, Jan 1, and spending cuts below plan that begin on the same day. How is that event characterized as systemic, or developed over decades?
The decisions that created the 'cliff' were all made in the past 4 years, but the motive behind them is mostly debt reduction, a problem decades old.

Still, IIRC, by the time Obama leaves office, he'll have most of the debt too.

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