Fiscal Cliff Turns Into Fiscal Bluff

Fiscal Cliff Turns Into Fiscal Bluff

“What’s a five letter word for ‘cliff’?“ an editorial page cartoon asked.  The answer: “Bluff.”

To bluff is to mislead and that’s an appropriate summary of the fiscal cliff agreement, which will raise taxes and spending, while failing to consider the country’s growing debt crisis.

The market reacted positively, with the Dow Jones Industrial Average initially up more than 2% and markets in other parts of the world showing similar gains.

The market reaction was not, we suspect, because a well-crafted agreement that benefits America had been negotiated, but because the “fiscal cliff” had been avoided at the last possible second.  Consider what the agreement does – and what it doesn’t do.

What it does:

  • Higher taxes for working Americans.  Expiration of the payroll tax break means that anyone who works for a living will have to pay an additional 2% of income in taxes.  That’s $1,000 for every $50,000 of income.  The Tax Policy Center estimates that the tax increase will affect 77 percent of American households.
  • But higher still for those with wealth.  Individual taxpayers earning more than $400,000 and families earning more than $450,000 will pay higher taxes.  Those making more than a million dollars year will see their taxes increase by an average of $171,300 a year.
  • Continue special tax treatment for favored causes.  Your taxes may be going up, but not everyone’s will.  Among those you will continue to subsidize, apparently because of their importance to our economy, are Hollywood’s movie industry, owners of NASCAR tracks, companies operating in American Samoa and rum distillers.  Tax deductions were preserved for each of these groups.

What it doesn’t do:

  • Reduce spending.  An extension of unemployment benefits will cost more than $30 billion, which will more than offset the $15 billion in spending cuts included in the agreement.
  • Address the federal debt.  In two months, the $16.3 trillion federal debt will bump against the debt ceiling.  In initial negotiations, President Obama asked that the debt ceiling be eliminated, which would allow spending to continue, unchecked, and debt to accumulate.
  • Address unfunded entitlement liabilities.  As we’ve previously noted, the federal debt in a big problem, but unfunded liabilities are an even bigger problem.  Medicare, Social Security and pensions of government employees not account for $86.8 trillion in unfunded liabilities.
  • Address “sequestration.”  A major concern about the fiscal cliff was that it would result in automatic, across-the-board spending cuts totaling $1.2 trillion over 10 years.  Some were especially concerned about further cuts to the defense budget.  Dealing with sequestration, though, has been postponed until March.

Those of you who enjoyed having Congress take us to the precipice can rejoice.  We’ll be doing it all over when President Obama and Congress debate the debt ceiling and sequestration.  In other words, more bluffing ahead.

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