Fiscal Cliff Predictions

As usual, I turn to Prof Sowell to explain some useful background information regarding the 'fiscal cliff'-more like a fiscal slippery slope.

http://jewishworldreview.com/cols/sowell120412.php3

http://jewishworldreview.com/cols/sowell120512.php3

As usual, it is an unholy mess largely caused by the Left, with some assistance from Bush. Of interest, these controversial tax cuts have SFA to do with it. More propaganda and lies from Comrade Obama.

[huh, try this again] This is what I'm seeing - tax rates are going up as a matter of law, regardless of what Congress decides or is amenable to agree to. The choice for the Republicans is not whether they'll agree to taxes going up but whether they'll support legislation to make permanent the bottom four rates for folks with taxable income less than $250K. They'll want an AMT patch in there too. Payroll taxes are going back up to 6.2%. Why does that not provoke wailing and teeth gnashing - because it doesn't apply to income over $108K. Capital gains rates will be going up, dividends will probably be going up.

On the spending side. The GOP seems to be offering figures but not specifics. Is it going to be entitlements, discretionary, or a blend? I notice too that the way the numbers are presented do not reflect the large cuts agreed to during last year's negotiations. $1.6T in cuts over the next 10yrs with additional cuts I believe coming from the sequester deal. This also is already a matter of law. Congress had the opportunity to find specific cuts for that agreed to figure built into the sequester, but punted b/c of the inability to do their jobs, and now it's set to be cut along the parameters of the sequester which is a bit immediate and drastic, hence the 'cliff' part. The cliff of austerity - i.e. see Europe crapping the bed with senseless contractionary policies in the midst of global slowdown.

no cliff

The AMT adds a whole other dimension to this debate.

There will assuredly be a patch to raise the exemption. But its still going to be there. In fact it adds a nifty little screen for politicians to look like they are cutting people's taxes when they really are not. For example, there is talk of capping the mortgage interest deduction to about $25000. But I'm pretty sure that is a deduction that is added back to calculate the AMT. The upshot is that capping the mortgage interest deduction and raising a taxpayer's regular income tax could mean that it is a tax they would be paying anyway through the AMT. Therefore taxes are not being raised that much more than what it was in the first place.

Even better (from a politicians perspective), it shifts the tax burden from the AMT to the regular tax system. Less taxpayers see the AMT on their return and it makes it look like the AMT is being successfully dealt with by the politicians when it isn't. Yet another great thing is that the AMT doesn't effect the super wealthy people who control the political system. They don't pay it. Or at least very little of it. The super wealthy have other tax benefits to take advantage of that are much better than the deductions added back in the AMT. They are much more concerned about the top marginal tax rates.

Mark my words. Whenever a deal is worked out you will see a lot of attention given to a cap on various deductions with a corresponding reduction in rates. The media will not tell you anything about the AMT.

[quote]lenny wrote:

Why should Obama offer more cuts? Republicans will reject ANY proposal. Let them counter offer and tell the American people exactly what programs they want cut. So far they have offered nothing.

[quote]Medicare and Social security. Open your ears jackass!

look clown, this isn't a damn football game or NASCAR race where you cheer on your guy because it's all a game. You understand that the US fed govt can simply not continue to spend more than it takes in, right? Do you understand that? Do you get the ramifications we will already experience as a result of being trillions in debt? Grow up.

POMPATUS OF LOVE wrote:

Details? WTF is wrong with you people? There are probably a few trillion $$ of deductions that could be eliminated. What - Bohner has to cite which ones?

Um, Yes.

When you introduce a bill, you can't write down - eliminate some deductions.

You have to specify which ones because these words are important when something is a law.

(I know you were throwing a softball troll pitch there)

gasser wrote:

I notice too that the way the numbers are presented do not reflect the large cuts agreed to during last year's negotiations. $1.6T in cuts over the next 10yrs with additional cuts I believe coming from the sequester deal. .

Unfortunately 1.6T is not a large cut in spending over 10 years. It is at least a start, though. Whatever compromise they come up with will backload all of the cuts into years 8-10 of a 10 year budget plan that has no hope of becoming reality. They will just keep kicking the can down the road.

X-Runner wrote:

We're not talking about wise men we are talking about congressmen.

What do you think they will do and when?

I gave up trying to guess what corrupt men would do long ago.

I'm for going over the so-called cliff (all rates go up and sequestration happens). We need a correction and the longer we put it off the worse it'll be. Just do it already. It's gonna hurt but we'll be better off in the long run.

BTW - someone tell me why the millionaires and billionaires should be paying more again?

http://online.wsj.com/article/SB10001424127887324705104578151601554982808.html

millionaires, billionaires, and those that make north of $300K are being asked to pay more because they can, and more importantly, because doing so will cause the least damage to the still recovering economy. It's a matter of discretionary income, not morals or fairness. Where lower income Americans will feel the pinch is in entitlement benefits and social programs, which will shrink. This is also not due to morals or fairness but to math. Perhaps when the economy get humming again the tax burden can be spread a bit more broadly and there can be additional cuts on the expense side.

~ wrote:

millionaires, billionaires, and those that make north of $300K are being asked to pay more because they can, and more importantly, because doing so will cause the least damage to the still recovering economy.

Prove it, besides reciting Paul Krugman.

Spurious correlations to the past need not apply. Show me a solid economic model.

Econ 101 - Principle of income elasticity of demand.

Paring down the deficit is going to hurt economic growth no matter how you structure it. Decreased spending will lead to decreased production whether contraction comes from the supply side or the demand side. Who ultimately pays for the deficit cuts will depend on the allocation of supply side or demand side contributions.

Those of you who are in favor of upping SS and retirement ages assuming we are living longer. This generation of children is the first generation to be predicted to NOT live as long as thier parents.

The answer to reducing the budget is in military spending. Hardware reduction over three years alone could chop the deficit down a third. We would be no less safe.

The second part, for long term fiscal health, believe it or not is to reduce US population growth

Uh No. reducing population growth is not an answer. Actually a huge answer to all of our economic problems is simply letting recessions happen. Really, why don't we have an honest discussion about what would really happen if we went off this fiscal slope. Apparently we would go into recession. So what? People treat the word "recession" like characters in Middle Earth use the word "Mordor". Same vague, ominous evil land. Recessions are perfectly healthy and helps set us on sustained paths of more long term growth. Inefficient businesses that are not providing value for the money go bankrupt. Assets reorganize and become more efficient in creating wealth. People fear recessions will cost millions of jobs. In case you haven't noticed, there are very little jobs being created now for all the radical stimulus that has happened the past few years. A huge boost for creating jobs would be to let asset prices drop. Inflation to drop to zero or even have some tame deflation. It would lower overhead for businesses that provide some kind of quality value to people to help hire people. Instead, whenever the stock market goes into bear territory and enough corporations go bankrupt the corporate media freaks out and we have to create some kind of new corporate welfare to prop up asset prices and stock market. Of course nothing is ever done to cut taxes on jobs like payroll taxes or raising the standard deduction. So we end up with the worst of all worlds for workers. High unemployment AND sustained inflation. But home values are high, stocks go back up and everything is fine.

XY wrote:

Those of you who are in favor of upping SS and retirement ages assuming we are living longer. This generation of children is the first generation to be predicted to NOT live as long as thier parents.

The answer to reducing the budget is in military spending. Hardware reduction over three years alone could chop the deficit down a third. We would be no less safe.

The second part, for long term fiscal health, believe it or not is to reduce US population growth

Actually, I somewhat agree Ryan. But we should've done it in 2008 and restructured the debt then, implementing fiscal and entitlement reform. People think Bush/Obama/Paulson/Bernanke saved us from a devastating collapse, when, in reality, had we gone about it the right way, we likely would've reached "escape velocity" by now (the 20-21 depression was sharp and short). But, instead, we are merely prolonged and exacerbating the inevitable. The worst thing the government did was picking winners and losers in terms of which banks to save, which mergers to facilitate, thereby creating moral hazard, not to mention their interference in the housing bubble by obfuscating the price and transparency of credit via feckless monetary policy, subsidizing the GSEs such that they were no longer merely quasi-governmental organizations, and endorsing a ratings oligopoly. And where was the SEC post Sarbanes-Oxley?

Obviously taxes are going up, but spending has to be cut big-time. We could implement fiscal reform so that's it's pro-growth, but our politicians will fumble the political football.

~ wrote:

Econ 101 - Principle of income elasticity of demand.

Paring down the deficit is going to hurt economic growth no matter how you structure it. Decreased spending will lead to decreased production whether contraction comes from the supply side or the demand side. Who ultimately pays for the deficit cuts will depend on the allocation of supply side or demand side contributions.

You're going to tell me about Econ 101 without answering my question? Seriously? Wow, thanks for enlightening all of us.

~ wrote:

Ryan, you're generally pretty knowledgeable about this stuff but you're wrong here. You're conflating micro and macro effects. A tax increase of a couple percent isn't going to bury the individual taxpayer, but a $600B aggregate rise in taxes in one year is equal to 4% of the $16T economy. It will have macro effects large enough for most companies to revise their revenue guidance. It will have a negative effect on GDP of up to a couple percent and it will most likely lead to negative foreign sentiment about the business environment here not to mention the safety of our public debt. Budget deficits do not create this kind of demand contraction unless they spur an increase in interest rates which would similarly crowd out aggregate spending and demand and reduce economic output.

The output gap is so large and the velocity of money is at stall speed, so all of these predictions of rates ratcheting up have been wrong over the past four years and will continue to be in the short-term. Anemic growth and the overwhelming gravity of deleveraging will keep the long end of the curve tame. You are correct that raising marginal rates is contractionary with a multiplier between -2 and -4, depending on which study you cite. But the whitehouse only cares about fairness.