THE BLOG

Fiscal Fiasco Solved? Not Even Close

Jan 11, 2013 | Updated Mar 16, 2013

Congress had since the debt ceiling deal of August 2011 to create a solution for the fiscal cliff. Yet it was only until a few hours before the January 1 deadline when a Senate deal was finally reached -- a little over 500 days, if you're wondering.

Here's a basic overview of the deal:

  • Unemployment benefits extended for another year
  • Tax credits for college tuition extended for five years
  • Taxes on individuals and couples with incomes over 400,000 and450 thousand (respectively) increased from 35 to 39.6 percent (Clinton-era levels)
  • Estate taxes on estates valued over five million increased from 35 to 40 percent, indexed at the rate of inflation
  • Delayed sequestration cuts for two months
  • Prevented cut in Medicare doctor's salary ("doctor fix")

This deal has solved all our debt problems, right? Not quite. This deal managed to end the fiscal cliff debate, but it does little to remedy the debt crisis.

Not Out Of the Woods Yet

It seems that "prudent" is not a word in Washington's lexicon.

No provisions in the deal were made to address the issue of raising the debt ceiling of around $16.4 trillion, which had been already breached on December 31, 2012. The Treasury has given Congress and the White House a few more weeks before it will be forced to default on the nation's debt obligations, which will undoubtedly cause massive market instability.

To make matters worse, this deal also delayed the automatic cuts to entitlement programs and defense for two months, allowing this future battle to coincide with another debt ceiling clash. Perhaps the House Republicans exempted any debt ceiling resolutions from the deal in order to use the potential shutdown of the government -- a result if the debt ceiling is not raised -- as leverage for the second debt ceiling battle to gain concessions from the Democrats with these cuts. Washington has yet again produced another ideological budget battle coming within the next few months.

Let's Talk Taxes

Our current situation is comprised of two problems: decreasing the deficit and stimulating growth. Stimulating growth requires more money and demand that usually translates into lower taxes and increased government spending in infrastructure, defense, education and so forth. Decreasing the deficit there needs to be increased taxes and less government spending that then translates into slow growth and high unemployment -- this method is known as austerity, something we're currently seeing in many European countries. Solving our problems requires two, almost contradictory, solutions. Therefore, Congress and the President must take a balanced approach of addressing the debt as described by Robert Reich: first by growing the economy by increasing demand, and then, when the economy is strong enough, implementing more taxes and spending cuts. The deal does the opposite of this.

This deal does not extend the payroll tax, thereby causing an increase of taxes for 77 percent of Americans -- an extra $960 per year for an average family earning $50,000. This decreases the demand (middle class spending) in the economy, slowing growth. Granted, the deal does also increase taxes on individuals earning more than $400,000 and couples earning more than $450,000; however, the effect in demand and growth will be negligible given that those earning more than $400,000 represent two percent of the American population. Nevertheless, the tax increase on the rich is not the tax increase we should be talking about.

Despite considerable media attention on this issue, Congress and the President have yet to address the payroll tax increase while millions of Americans lose income that would have filled gas tanks or paid down debts.

What Special Interests...?

Remember these meetings CEOs had with President Obama and House Republicans? CEOs from companies like Yahoo!, Goldman Sachs, Coca Cola, GE, and Comcast came together and urged the President and Congress members to create a deal; basically, the CEOs pushed for increased taxes in order to avert the fiscal cliff.

Wait...they're in favor of tax increases? But that's unheard of! Maybe because these CEOs were actually lobbying for tax extensions, around $250 billion in tax breaks for their respective corporations. For these corporations, an income tax increase is worth the extra billions they will have saved; besides, who doesn't earn their income through capital gains nowadays?

This fiscal cliff deal, meant to solve the nation's debt problems, became the prime opportunity for corporations and special interests to secure their ridiculous subsidies -- billions of dollars that could have lowered the debt, funded education, or improved infrastructure. America, we just got robbed.

To get a sense of what I'm referring to, here are some corporate subsidies that were extended by the fiscal cliff:

  • $43 million over two years for NASCAR and associated organizations
  • $165 million a year for railroad companies to maintaining their own tracks
  • $150 million over two years for television and film production
  • $1.6 billion to fund Goldman Sachs and Bank of America offices in New York
  • $9 billion tax loophole for banks and manufacturers that allows no taxes to be paid through income earned with certain trade practices
  • $1.5 billion for a tax break for US multinationals who own of corporations abroad
  • $8 billion (projected) tax credit for R&D
  • $110 billion (projected) tax credit for bonus depreciation (more on bonus depreciation here)

The fiscal cliff deal we were given was fashioned in a matter of days with too little revenue initiatives, no spending cuts, no debt ceiling resolutions, and a cornucopia of corporate tax extensions. The American economy needs stitches not a band-aid.