Over the Cliff? More or Less, Yes
By Bill Dunkelberg
As most expected, Dec. 31 came and went with no resolution to the so-called “fiscal cliff.”
In usual panic, last-minute mode, Congress agreed on tax rates. That was a pleasant surprise of course, but taxes also went up. The income tax increase for those earning more than $400,000—the rate rose from 35 to 39.6 percent—will garner only about $60 billion annually (assuming people don’t find ways to evade higher taxes, which they always do). This is a drop in the bucket compared to the $1 trillion deficit in the budget.
Add that increase to the extra taxes imposed by the healthcare law on high earners (3.8 percent more for capital gains earnings above $200,000), medical devices, tanning salons and so on. The top estate tax is now 40 percent on estates worth more than $5 million, indexed to inflation. Some popular tax extenders were given another year of life, and the alternative minimum tax was permanently fixed.
Still, none of this will do anything to put a dent in the deficit and debt that continues to pile up. And, the fiscal cliff deal did nada to address spending.
Indeed, nothing was done other than kick the can down the road to this spring, pushing the mandatory “sequestration” cuts right into the debt ceiling debate. The administration expects, of course, to not make cuts in anything. That would be too painful. Rather, the indication is that more attempts will be made to support spending with even more tax hikes. The Senate (and therefore Congress, as a whole) has not passed a budget in almost four years.
This is the Greek railroad, government-owned business model small business owners feared. How long can we finance one-third of our government’s spending by borrowing money? Many countries in Europe have found their answers—they are in recession now and can’t use someone else’s money to support their spending. Big picture, this is a negative for the economy. Raising taxes and cutting government spending will have an adverse impact on GDP growth. People will have less after-tax income, and lower government spending means somebody’s income, whether doctors or defense contractors or federal employees, is smaller.
Think of it this way: In a world where governments balance their budgets, cuts in government spending are supposed to mean tax cuts, adding money back to the private sector to spend and pick up the slack. But when we borrow $1 trillion every year to support spending, government cuts reduce incomes, but don’t reduce taxes dollar for dollar. They merely reduce borrowing (from China, for example). Thus, there is no boost to the private sector.
Resolving the uncertainty about tax rates is a positive. Owners make decisions to invest in their businesses or hire new workers based on after-tax profits. Knowing these rates is important, even if they are higher for some.
But, this will not offset the negatives that will result from our current fiscal mess. Add to that the flow of new regulations now being released (probably held back until after the election), and it will be a tough year. Nothing is changed on Capitol Hill. Check out the Sandy Relief Bill, which stalled while people suffered because so much pork had been added that is irrelevant, expensive and unnecessary.
Americans voted for more of the same and they’ll probably get it, leaving 2013 looking pretty much like the year we just left behind.