Almost as soon as the 2012 Presidential election was called for Barack Obama, the media and collective punditry turned their attention to another issue, the so-called “Fiscal Cliff.”
It’s important to dial back the drama and look at what’s really going on with the Federal budget. The current situation is called a cliff because of the steep reductions in the deficit that will be triggered if no other action is taken before December 31. Many automatic spending cuts will begin; various safety net and stimulus funds will diminish or end (such as unemployment benefits); tax rates for all Americans will go up.
Taxation is the issue which will matter the soonest and has become the sticking point in the current debate. The other issues ease in over the year with plenty of time for Congress to (re)consider them. Tax rates will go up on January paychecks.
President Obama campaigned — and won — on a promise to keep taxes low for poor and middle class Americans and to restore slightly higher rates for the wealthiest 2%. Under his plan, nearly $1 trillion in additional revenue would be realized by increasing the top rate by about 4% and the dividends rate by 5%. This will happen automatically when the Bush tax cuts end at the close of the year. Unfortunately, so will tax cuts for the other 98%, resulting in a relatively more painful income reduction for most families.
Sadly, because of the way the tax code is structured, the overall impact of the change is much worse the less you make. The New York Times has some wonderfully detailed charts that explain how this happens. It boils down to three things:
- In general, higher earners rely less on wages and more on investments which are taxed at a lower level, so raising income taxes hits lower earners harder.
- Payroll taxes are capped at about $100,000 of income, so earning more than that does not result in higher levels of these taxes, making the overall rate lower.
- Corporate taxes, which are disproportionately borne by higher bracket payers (and then passed along to their customers…) are also historically low and are not even on the bargaining table.
Republican leaders in Congress complain that taxes are too high as it is and that raising them will hurt small businesses and job creation. The facts don’t line up with these claims. Independent analysts note that less than 8% of small businesses would pay the higher tax rates. Even more significantly, a majority of small business owners express little concern over the tax rates. They are much more worried about changes in Medicare, which is a central element in the Republican plan.
The Times site mentioned above shows that taxes are lower than they’ve been in 30 years. In fact, Republican president Eisenhower left office with tax rates significantly higher and a booming economy. Tax reform is important, but it should heed the advice of Warren Buffett: a millionaire should pay a higher rate than should his or her (mostly his, by the way) employees.
Boehner can complain all he likes, but if he does nothing, everyone’s taxes will go up. So far, his proposals have lacked any details and have not struck any of the balance required by the President to get his signature.
The Senate passed a fair bill months ago that is languishing in the House. Minority Leader Nancy Pelosi, demonstrating true leadership again, is working on an administrative process to force it to a vote so that 98% of American’s can get the fairness they deserve. President Obama has made it clear that he’ll support the bill. Will the lame duck House allow petulance to trump action? It remains to be seen. One thing they should note: the majority of Americans will hold the GOP accountable if we start heading over the cliff.