No one is celebrating after America pulled back from the fiscal cliff, because it is obvious how bad the problem still is.
www.telegraph.co.uk – American Way: Mark McKinnon
If the infamous fiscal cliff in America was averted, why is no one celebrating? Because the abyss below just got deeper.
Near the midnight hour on New Year’s Day, 2013, the US House of Representatives passed the American Taxpayer Relief Act of 2012, by 257 votes to 167.
The bill had already been approved in the Senate. Its intent: to avert the largest tax hike in American history.
So, why no hoopla? No “Huzzahs”? Surely these members of Congress acted heroically. Were Americans simply too hung over from their holiday parties to notice? Or, more likely, were they too weary of Washington to care?
The threatened $500 billion in tax increases had been designed, by this very same Congress, to be triggered automatically on Jan 1 if an agreement could not be reached on other ways to reduce the US government’s deficit spending.
But they represented only one facet of the fiscal threat that might have plunged the fragile American economy over the proverbial edge, where only further joblessness would gain a foothold.
More than $1 trillion in automatic spending cuts over 10 years, half of that from the defence budget, were also part of the “compromise” deal struck by Congress in August, 2011. That was during the last crisis du jour, the debt-ceiling negotiations.
As is so often the case in Washington DC dialect, words do not mean what you think they mean. That agreement was called the Budget Control Act, but did not include a budget, did not control spending, and the only act required of Congress was to delay hard decisions.
That kick-the-can-down-the-road “act” temporarily raised the nation’s debt ceiling, or borrowing limit, by $2.1 trillion, in return for some to-be-determined-later solution to Washington’s overspending addiction. If none was found by Jan 1 this year, the tax increases and spending cuts would kick in – and the combination would send the economy over the cliff.
So, here we are today. Phew! A deal was reached in the final moments of the 112th Congress and the fiscal cliff was averted, right? Well no, not really.
The Taxpayer Relief Act did indeed bring some relief: it made made permanent the tax cuts on income, capital gains, and dividends first enacted under President George W Bush and renewed under President Barack Obama, for individual taxpayers with incomes up to $400,000, or $450,000 for married joint filers. It will spare the average family from a tax increase of $1,250 this year. This is good.
But it increases federal tax on the top two per cent of earners from 35 per cent to 39.6 per cent, limits their deductions and credits, and taxes some of their dividends and capital gains. This is, sadly, necessary.
So is the expiration of the temporary two per cent cut to payroll taxes, enacted in 2010, which lowered employees’ contributions towards the social security programme. This will affect all earners, but will be most painful for middle and low-income households which depend on every dollar in every paycheck.
As a result, the average family will see about $1,000 less in income this year – a tax rise that went through quietly, with no mention by President Obama in the national address he delivered after the deal was finally struck. But, as families in real America receive their first paychecks in coming weeks, expect discontent to be loudly voiced.
And while other murky details of the deal emerge – including, oddly, millions in tax breaks for Hollywood, NASCAR stock car racing, and the wind-energy industry – the White House calculates that $620 billion in new tax revenues will be raised.
So did the deal fix the fiscal mess we face?
No. Focusing on a hangnail but not the severed hand misses the point of triage. The deal included only $1 in spending cuts for every $43 in new tax revenue. So, the abyss of debt remains – and it’s inky red and deep.
What lies ahead then for the 113th Congress, newly sworn in on Thursday? And for the President, who will be inaugurated for his second term on January 20?
Another shutdown showdown is likely in less than 60 days, because at $16.4 trillion in debt and a debt-to-GDP ratio unseen in 70 years, the federal government has once again reached its borrowing limit.
It will run out of operating funds, and a default looms in the next two months unless Congress agrees to the President’s request to raise the debt ceiling once again.
The delayed $1.2 trillion in automatic cuts begin in March, with the defence budget still bearing most of the burden – some $50 billion this year alone. Entitlement programmes already soak up nearly 62 per cent of all federal spending, and Medicare and social security, the two benefits aimed mostly at elderly Americans, are nearing insolvency: 10,000 ageing baby boomers are becoming newly eligible every day.
Meanwhile the President has threatened more tax increases, warning: “If Republicans think that I will finish the job of deficit reduction through spending cuts alone they’ve got another thing coming.”
The abyss of debt deepens. And the political divide widens. Democratic and Republican lawmakers are united on one front only: each hopes the other side will go over the edge first.