Symposium 2012: What are the consequences if America goes off the fiscal cliff?

RMC3: I think the media is vastly overplaying the significance of the fiscal cliff issue. If you didn’t know any better, you’d think the world was going to end on January 1st if we don’t have some sort of deal to avert the fiscal cliff. Here’s what we know.
First, the payroll tax holiday that has been in effect for the last couple of years will end. That means that every single worker who gets a paycheck will get a smaller paycheck that first week in January. This has nothing to do with whether you’re making big bucks or not. If you’re a minimum wage worker, you’re paycheck is going to shrink. Remember, the payroll tax holiday was just a temporary 2% reduction in the Social Security withholding. It may not be much to the individual when it goes away, but it is going to go away and workers will see their paychecks shrink a little.
Second, effective January 1st, all of the Bush era tax cuts will expire, and we’ll revert to the tax rates of about ten years ago. So, if you’re a worker that had previously been in the 10% income tax bracket, you’ll suddenly find yourself in the 15% tax bracket. That’s a 50% increase in your tax rate. What I think people fail to realize is that everyone’s tax rate is going to increase if there’s no deal, and actually workers from the lowest tax brackets will see their taxes increase more in percentage terms than those in higher brackets. That’s just a mathematical fact.
Third, effective January 1st we’re going to see automatic spending cuts at the federal level with the Department of Defense taking the biggest hit. This is what is called the sequester. Programmes across the board are face sharp cuts in funding, and we’ll see a lot of innocent people get hurt. Defense spending cuts are going to ripple through the private sector and you’ll probably see massive layoffs at defense contractors like Lockheed Martin, Boeing, Northrup and so no.
Fourth, in the absence of a patch to the alternative minimum tax, we’re going to see millions of Americans pay higher taxes under the AMT. The AMT was originally intended to get taxes out of high income earners when it was established back in the 1960, but the AMT threshold hasn’t kept pace with the definition of ‘high income earners.’ So, without a patch, if you make over $32,000, you’ll fall under the AMT, and you’ll be losing deductions and paying much higher taxes.
So, if there’s no deal, there will be a number of consequences for taxpayers. Is failure to reach a deal going to spell economic disaster? It wouldn’t be economic Armageddon, but it would tend to reduce the level of economic activity. I and others here at Thinking Outside the Boxe have been expecting a double dip recession. The failure to reach a deal on the fiscal cliff may hasten that, but reaching a deal will not by itself be enough to avert another recession. And look, reaching a deal isn’t going to do anything to fix the fundamental problem with our economy…low growth. The economy sucks right now and it’s only going to get worse. Businesses aren’t hiring and aren’t going to higher because of the consequences of Obamacare. And we’re going to start seeing the full effects of that legislation and all the new fees, taxes and burdens on business in the next year or so.
But this is about the fiscal cliff, and I don’t really think it matters too much in the bigger picture whether they reach a deal or not. The economy is going off the cliff one way or another. If taxes go up, taxpayers are going to be real upset, but they’ll suck it up and pay the higher taxes. We’ll end up in another recession sooner rather than later.
Let me be very clear in this so there is no confusion. I oppose higher taxes. Governments can’t tax their way into prosperity. It just doesn’t work that way. If that were the case, Europe wouldn’t be in the economic mess it’s in. I don’t want to see the Bush era tax cuts expire. I think that is going to hurt each and every taxpayer in the United States. Nonetheless, if you recall, I and others on this panel vehemently opposed the payroll tax holiday. I think that was an ill conceived idea from the start, and all it did was rob from an already bankrupt Social Security trust. So, I think that needs to be taken out of the equation. The payroll tax holiday needs to go away. We can’t afford to keep robbing the Social Security trust.
The simple fact of the matter is that the federal government has a spending problem. The Congress has been spending like drunken sailors for the four years, and we simply can’t afford to keep racking up trillions of dollars in spending deficits and tacking it all onto the national debt. If the sequester is going to mean cuts in spending, so be it. It’s a start, but it’s not nearly enough. When we’re running deficits of over a couple trillion dollars a year, spending cuts of five hundred billion annually just isn’t enough to close the gap.
Ending the Bush era tax cuts wouldn’t be so bad if spending at the federal level would revert to pre-Bush tax cut levels across the board. Let’s see, before the tax cuts, we had a budget surplus. If the tax rates reverted and spending was cut to the same levels as the early 2000s, we’d have a surplus again. But wait, the Democrats just want to raise rates, and neither party wants to have meaningful and drastic cuts in spending. Why? Because no one wants to make any sacrifice.
So, from my perspective, I don’t want to see higher tax rates, but whether we get a deal done or not, I don’t really think it’s going to change the overall picture for our economy and the challenges we face over the next few years.

Cartwright: Take the bus off the damn cliff and get it over with. Fact of the matter is the end of the Bush tax cuts will have a bigger effect on people in the lower tax brackets than people in the higher tax brackets. And guess what, those in the lower brackets are probably the ones who voted Obama a second term. So, when their paychecks get smaller next year, they can thank him. Don’t blame the Republicans, just thank the Democrats. This is what they want. They don’t care if we go off the cliff.
Everything that Mr. Clinger said in his response is right. If we go off the cliff, it’s not the end of the world. The government’s profligate spending is what is going to destroy us. No one at this event can individually spend more than what they make on an on-going basis. It just doesn’t work that way. Everyone here has a budget that they have to adhere to. We all have spending limits. We can’t just print money. But the politicians in Washington don’t understand that, because they think they can just print more money or tax people more. They’re economic idiots!
There’s a fundamental problem when you constantly budget annual increases, and the only reductions in spending are reductions in the increases in spending. It would be like each of us budgeting for a 10% per year increase in our spending budget when in reality our income is only increasing by 3% or so. After the first year, we find ourselves in debt because we spent more than we made. So, for the second year, our spending budget is based on the prior year’s level but with only a 5% increase. And in reality, in the second year, our income only grows by 3% again. We go in the hole again, then we do the same thing in the third year. This is asinine, but this is the way they do it in Washington! Make any sense?
If we are ever to get meaningful spending cuts, we need to cut the base spending not just the rate of increase in spending. So, if we spend $1 trillion this year, we spend only $900 billion next year. That’s cuts in spending. And actually, that’s what the sequester does, but have you noticed that no one in Washington wants to go along with that plan now? Oh, let’s not cut spending. Hell, that’s just what we need, but sadly the sequester doesn’t go far enough.
But there’s a second part to this equation that we can’t forget—revenues. If the economy were growing at about 5% or 6% annually for a couple of years, we’d be generating a lot more in revenues and the budget deficit wouldn’t be so large. We you have an economy that is producing at its potential, there are a lot of positive benefits—people are working and paying taxes and spending money. All of that leads to a strong economic base and higher revenues brought in from taxes. Just think, if we reduced the headline unemployment rate from 7.9% to 6%, we’d be looking at about 3 million more people employed. That means there’d be 3 million more taxpayers paying payroll taxes, income taxes, sales taxes on goods purchased, etc. And, if we could reduce the real unemployment rate—that counts people who have given up looking for jobs or who are working less than what they want—to 6%, we’d be looking at about 10 million workers back in the workforce. Think that would have an impact on getting the economy going? Obviously, we’re talking big numbers, but I don’t want to overplay what it can do. People working isn’t the cure for all our problems. We have to have spending restraint at the federal and state levels. We’ve got to make meaningful and deep spending cuts across the board. No programme and no department should be spared on the spending cuts. Everything from entitlement programmes to defense to education to foreign aid should be on the chopping block.
Sadly, I’m afraid the Republicans in the House of Representatives are going to cave and give in to the President. So, we’ll get higher taxes and virtually no meaningful spending cuts. We won’t get any tax reform or changes to entitlement. Let’s go off the fiscal cliff now, let the economy go into recession again, then have a meaningful debate during mid-term elections in 2014. By then, maybe the Republicans can have their acts together and actually get something accomplished. Ah, but wait a minute! We’ve got the debt ceiling issue coming back up in early 2013. So, maybe that will be an opportunity to force some massive spending cuts. Or maybe they’ll just raise taxes again.
But I’d like to make one more point if I may, and that’s about the effects of Obamacare in 2013 and beyond. We’re starting to get a picture of what this is going to mean in terms of new taxes, fees, or whatever they want to call it. Make no mistake, each and every single American worker and taxpayer is going to be paying more to the federal government starting next year just to pay for Obamacare. I know there are a lot of people out there who don’t think it is going to affect them, but they’re going to be in for a rude awakening. There’s stuff in that bill that the IRS is finding out about now that no one ever dreamed of. It isn’t going to be pretty, and businesses aren’t going to take this lightly. Businesses aren’t going to hire or expand if they’ve got this massive new expense. And how are we ever going to get the economy going again if businesses don’t hire workers or start laying off workers again or reducing them all to part time? Not everyone can work for the government.

Michigan: Our government will have to pick and choose as to who gets paid if we go over the edge. I would think that the debt would get priority. If the interest on the debt was not paid it would have world-wide repercussions. Social Security should be next on the list. Social Security is not an entitlement as some people would like to think. Medicare and Medicaid might be next. Tax refunds might be slower being issued. My guess would be that a compromise in some form will be agreed on.

Sydney: America simply cannot afford to go off the fiscal cliff. The obvious and immediate consequences would be cuts to public services (this involves 1000s of programs across the country) that would come into effect immediately. Tax hikes and budget cuts are other obvious consequences that everyone would be aware of. However if there appears to be a possibility of an agreement being reached the tax hikes and budget cuts could be delayed by a few weeks. If the government is unable to avoid the fiscal cliff it is very likely that the fragile economy would be plunged back into recession. A large increase in unemployment and uncertainty in financial markets would also eventuate. There would also be global consequences as world financial markets would be affected by turmoil in the American economy. In fact, we have already seen a preview of what may occur when global stock prices dropped because the Republican leaders’ plan to avoid the fiscal cliff failed. It is interesting to note that theoretically the fiscal cliff could be avoided if the Congress and the President simply agreed to extend tax cuts and overturn the spending cuts that are part of the law that governs the fiscal cliff scenario. However, this would merely delay the inevitable. Both the Republicans and Democrats realize that the current situation is untenable and measures need to be taken to ensure the Government does not suffer from crippling debt in the future. The question is how?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s