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.
