News Column

Tax Increases, Spending Cuts and Fears of Fiscal 'Vertigo'

Nov. 19, 2012

Randy Krehbiel, World Staff Writer

fiscal cliff

The "fiscal cliff," say a good many economists and financial experts, is really more of a slope.

A long, bone-jarring slope into a rock-strewn ravine.

True, the massive changes in taxes and spending that Federal Reserve Board Chairman Ben Bernanke dubbed the fiscal cliff kick in all at once on Jan. 1. But the full effect, they point out, will occur in stages and will not be felt immediately.

Financier Warren Buffett thinks the economy would survive the plunge just fine. Economist Dean Baker says a month or so of bumping downhill would probably not do much damage.

Still, it is hard to imagine any American who would not feel at least some tinge of vertigo if the New Year arrives with the nation teetering on the brink. Taxes will go up, federal spending will go down and hundreds of billions of dollars will begin disappearing rather quickly from the economy.

The components of the fiscal cliff fall into two basic categories: tax increases and spending cuts.

Initially, more than 90 percent of the tax increases involve the expiration of various tax cuts and advantages, some of them going back more than a decade. A smaller share - about 7 percent - are related to the Patient Protection and Affordable Care Act, or Obamacare.

Most of the spending cuts would be the result of sequestration, put in place more than a year ago in the mistaken belief it would speed an agreement on deficit reduction. Under sequestration, across- the-board spending cuts of $1.2 trillion over 10 years, or $109.33 billion per year, go into effect on Jan. 1.

Another $37 million would come from expiration of emergency unemployment benefits and "doc fix," a bill that temporarily raised payments to Medicare providers.

The conservative-leaning Tax Foundation identifies eight tax increases, totaling $514 billion for 2013, with the fiscal cliff. The eight are:

Expiration of the 2001-2003 Bush era tax cuts ($156 billion). All but those now in the 15 percent tax bracket (joint house income $17,400 to $70,700) would see their income tax rates go up 3 to 5 percentage points. Percentage-wise, the biggest increase would be for those earning less than $17,400, whose rate would go from 10 percent to 15 percent - an increase likely amplified by the elimination or scaling back of low-income tax credits. The top tax rate would go from 35 percent to 39.6 percent, its highest level since 2000. Taxes would also go up on investment income and capital gains.

Expiration of the payroll tax holiday ($125 billion). For the past two years, most wage-earners have paid 4.2 percent of their earnings to Social Security instead of the 6.2 percent paid previously.

Alternative Minimum Tax ($88 billion). Only about 1.5 percent of Oklahoma tax filers pay the AMT, but that could shoot up if one of its periodic "patches" is not applied. The AMT was originally supposed to keep high-income households from avoiding taxes entirely, but it's never been indexed for inflation. Without a patch, it could affect households with taxable incomes as low as $50,000.

Expiration of business expensing ($48 billion). In this case, business expensing is a term for allowing the full cost of machinery and other capital outlays to be deducted in a single tax year instead of depreciated over time. The rationale is to allow full or partial expensing during economic downturns to encourage large purchases. Businesses were allowed 100 percent expensing in 2011 and 50 percent expensing in 2012.

Expiration of other tax extenders ($40 billion). A catch-all phrase for various tax credits, deductions and other advantages, tax extenders are kissing cousins - and arguably more egregiously used - than earmarks. They include tax credits for using wind-generated electricity and building NASCAR tracks.

PPACA taxes ($36 billion). Five taxes associated with Obamacare go into effect in 2013 - 0.9 percentage point payroll tax increase for high-income filers, 2.3 percent tax on medical devices, $2,500 cap on medical flexible spending accounts, higher threshold for medical deductions and reduced tax deductions for compensation to health insurance executives and directors.

Estate taxes ($10 billion). The federal estate tax will go from 35 percent on estates above $5.12 million to 55 percent for everything above $1 million.

The concept of sequestration has been around since the 1980s but has never been triggered. No one seems to know exactly how this one would be implemented.

In September, the White House issued a broad breakout of spending cuts, but it is unclear how those would be implemented on the departmental level and below. The sequestration bill prohibits reductions in workforce, which will be very difficult for many government agencies.

Although the cuts are generally described as "across-the-board," such is not the case. Percentage-wise, defense would take a bigger cut than non-defense, and some programs - Social Security, food stamps and Medicaid among them - would not be affected at all. Medicare would see a 2 percent reduction.

Source: (C) 2012 Tulsa World

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