Nutter's Washington

Grading the Fiscal Cliff Outcome: Lots of F's and a Big Incomplete

The recent political action to avoid part of the so-called fiscal cliff was an incomplete and ugly display of a dysfunctioning political system and feckless national leadership.

If is difficult to find any joy on what was enacted when viewed in the confines of possible policy choices and the lay of the future fiscal landscape. However, it is important to grade the results and in a second piece I will grade the actions of the major participants.

Individual tax rates were the centerpiece of the long running dispute between the “tax anything that moves” liberals and “do not tax anything” conservatives. The new law retains the 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets enacted in 2001 permanently and the 33 percent and 35 percent income tax brackets for taxable income under $400,000. There is now a 39.6 percent tax rate on income above this level. For purposed of the article I will use the single taxpayer status to illustrate threshold levels. 

Therefore, income taxes will go up on high-income taxpayers a few thousand dollars plus a year, a situation that can be remedied by them by a little creative tax planning. The projected increase in overall government receipts from the rate increases will have an insignificant impact on the federal deficit, still accumulating at $ 4 billion a day. Economic grade C, Tax policy grade C

 While liberals are gleeful at “sticking it to the rich”, the two per cent payroll tax reduction expired. Therefore, while politicians pat each other on the back for saving the great middle class, the fact is, EVERYONE’S taxes will be going up. Economic grade D, Tax policy grade A

There is much ballyhoo over making the new rates permanent. Victory chest thumping over making the tax rates permanent is silly. Congress can change them anytime. Economic grade C, Tax policy B

The new law reinstates the phasing out of personal exemptions (PEP) for adjusted gross income over $250,000 and the limitation on itemized deductions. (So-called Pease amendment) These were horrible provisions when it was first enacted years ago and remain so. It is back door way to raise taxes, is intellectually dishonest and complicates tax filing.  Tax policy grade F minus.

 Capital gains tax and dividends tax will be 20 percent for taxpayers with income over $400,000. This does not include the new 3.8 percent health care tax on investment income above $200,000 so the top rate for capital gains and dividends will be 23.8 percent. Economic grade C minus, Tax policy grade C+

The new law sets Alternative Minimum Tax (AMT) exemption 2012 and adjusts for inflation thereafter. AMT is an outdated concept and should be repealed. This fix is next best result.  No economic impact, Tax policy grade C

Estates will be taxed at a top rate of 40 percent, in general, over the first $5 million in value. This is an increase from the 2012 rate of 35 percent. I have not reviewed the details on all these provisions such as carryover basis but in general this is a positive and settles an issue few care about. No economic impact, Tax policy grade B

A few other tax provisions to note:

• One-year extension of 50 percent bonus depreciation rules. No real economic effect now. Tax policy grade C-

• Extends American Opportunity Tax Credit (education) through 2017. Should not be in tax code. Tax policy grade F.

• Retains the doubled child tax credit ($1,000) permanently, its refundable portion through 2017, plus the expanded earned income tax credit (EITC) through 2017. Again, has no place in the tax laws as it is primarily an income redistribution and welfare program. Tax policy grade F minus

 Payments for the long-term unemployed was extended for another year. Might as well make this a welfare program. Without improvements in the program and with no end in sight, this grades out at a D.

A number of tax provisions that expired at the end of 2011 and 2012 are to continue without really culling the silly ones out. This is known as the extenders.  These would include the big business subsidy for research and development, ineffective and generous renewable energy subsidies and (I was so glad Congress decided to extend) the special provisions to NASCAR so they can build more racetracks propping up this billion-dollar entertainment enterprise on the backs of the middle class. Economic impact zero, Tax policy grade F

The Sequester of $109 billion for 2013 in reduction of budget authority covering defense and some domestic programs -the only thing Congress has done in recent memory to actually slow the growth of government- was put off for two more months. Cost of $24 billion masked by some budget games. Failure to even address any reduction in Federal spending gets Grade F minus minus.

The final item to note is that the debt ceiling of some $16 trillion was hit on the last day of the year. Treasury actions to manipulate books and defer payments will forestall actual default until late February. This is tantamount of charging your Master Card to pay Visa. Grade is incomplete

So there is the report card. Not much to crow about. Empty political victory for the President on tax rates increases that will not have any real effect on the deficit or the economy. However, Democrats cannot go back to this well again. Republicans crossed the line on “no tax increases” but hardly a Waterloo moment. The most troubling result is the deficit and debt is still climbing. That is the next battle royale

 Next, the political assessment of the key players.

 

 

 

 

 

Inadvertent Ignorance, Just Stupid, or Plain Deceit: Taxes Increase for Everyone

I just heard a liberal Democrat Congressman on a video cawing how the democrats just saved the beloved middle class taxpayers from any tax increases. No increase taxes at all, unlike Republicans who did not care if the middle class was crushed. It was not qualified to income taxes, just you-Mr., Mrs., and Miss Middle Class will not pay more taxes. 

This kind of just plain wrong tripe bothers me. It is wrong, wrong on its facts. I don't care about the politics, it is just not a true statement. In case this intellictually challenged public servant does not know, the employee payroll tax reduction of 2 perect in effect for the past two years was NOT extended. That means everyone, I mean everyone, no matter what income level, subject to FICA taxes will pay more. Not less, not the same, but more! 

If  a husband and wife make $80,000 in wages, their taxes will go up $1,600 next year. THAT, is an increase. 

I am not saying the reduction should have been extended. I am only asking that someone, in this case a political hack, get the story right.

 

Ban the Fiscal Cliff: Results Pathetic, Predictable and Incomplete

The phrase “Fiscal Cliff” should be stricken from the English lexicon. The recent political action to avoid the short term the political morass was an ugly display of a dysfunctioning political system and feckless national leadership.

What are the off-the-cuff lessons of all of this? What did we learn? Did any of this do anything at all to improve the national outlook?

The panic is over for now. However, the results are pathetic. 

Taxes will go up on high-income taxpayers a few thousand dollars a year, a situation that can be remedied by them by a little creative tax planning. (Call me, I am in the book!)  The projected increase in government receipts from the rate increases will have an insignificant impact on the federal deficit, accumulating still at $ 4 billion a day. In fact, the changes made this week, increases the budget deficit $ 4 trillion over the next 10 years according to the Congressional Budget Office.

While liberals are gleeful at “sticking it to the rich”, the two per cent payroll tax reduction expired. (And rightly so) Therefore, while politicians pat each other on the back for saving the great middle class, the fact is, EVERYONE’S taxes will be going up. This will have an adverse impact on the overall economy. Oops, look, my paycheck is smaller. To hide this fact is deceitful. To say otherwise is ignorance.

Payment for the long-term unemployed was extended for another year. Might as well make this a welfare program.

Victory chest thumping over making the tax rates permanent is silly. Congress can change them anytime. The only positive for this action is it lessens the unreality of the budget game played by having laws theoretically expire only to be reinstated to make the deficit look smaller. 

Many of the tax provisions that expired at the end of 2011 and 2012 are to continue without really culling the silly ones out. Stimulus tax measures enacted in 2009 which amount to quasi-welfare and income transfer programs that have nothing to do with paying taxes will also continued with our further examination.

The Budget Sequester-the only thing Congress has done in recent memory to actually slow the growth of government- was put off for two more months.

So what occurred it to pick up a few bucks from people who can afford it, pick up a lot of bucks from people who will feel the payroll tax increase, punted on addressing the deficit, and left all the spending programs untouched.

The sequence of events was predictable. Mr. Obama has to be happy for the hollow results of increasing tax rates, a minor political triumph not really worth anything.  He has to be happy the largess of the government continues. No spending cut here, guys. If there was any doubt about his interest in cutting federal spending, it is no more in doubt. 

What the President should not be happy about are the problems of a sour economy, deficit spending, debt ceiling exceeded already, sequester and funding the government have not gone away. He had a lot of clout and power concerning the tax rates, he has much less now and I doubt his sway over the House Republicans has increased.

So, the game continues.