Memo to the Media: There Is no Fiscal Cliff -- Stop Calling it That!
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SC: Well there are many pieces here, but the big ones are as follows. The Bush and Obama tax cuts expire on December 31st. If they’re not extended or something doesn’t happen legislatively then that means on January 1, tax rates will go up for everybody, no matter how much you earn. The President wants to obviously extend them for individuals who earn less than $250,000 and let them expire for those earning any more. That’s the first thing.
Secondly, you have the payroll tax cut through December 31st. On January 1st, if there’s no change, that will go up back to the normal rate. You have a variety of other expiring provisions. You have the alternative minimum tax, which will start to hit everybody earning from about $65,000 and over. It’ll hit a lot of middle class tax people. It might be the largest tax increase on American middle class earners in US history.
So all of that and a few other things would trigger at midnight on December 31st unless there’s legislative action. Then on January 2nd the spending cuts -- $120 billion in spending cuts were triggered when the Supercommittee failed to come up with a deficit reduction plan -- they will go into effect. That’s $60 billion or so from defense and $60 billion or so from domestic spending. You have this harmonic convergence, let’s say, of tax increases and spending cuts -- which would have an enormously positive impact on the deficit. It might reduce it by hundreds of billions of dollars, but it would be coming at the wrong time. When the private sector is not spending money and when individuals are not spending money -- for a new iPad or something like that -- when trade is not helping at all and state and local governments are cutting back – that's exactly the time you don’t need the federal government to be withdrawing stimulus in the economy. A tax increase or the effect of a tax increase would throw us, according to the Congressional Budget Office, eventually into a recession for a couple of quarters.
JH: Of course when you talk about the impact on the budget deficit, the leading cause of our deficit is the recession itself and the loss of tax revenues.
When the GOP candidates debated in Iowa last year there was this very telling moment. Every single one of them, including the so-called sensible one, John Huntsman, said that they would walk away from a deficit reduction deal that had $10 in spending cuts for each dollar raised in tax revenues. I think that was a reflection of what they thought their base wanted to hear.
That kind of problem often gets obscured by the media’s tendency to blame both sides for every problem in Washington. So I want to make this very clear: all of this -- the debt limit showdown last year, the standoffs over the Bush tax cuts in the past few years, standoff over extending unemployment insurance -- really gets down to the fact that Speaker John Boehner can’t get his caucus to cut any kind of deal that raises even a penny in taxes. Is that right?
SC: Oh, that’s absolutely right. John Boehner is probably the weakest Speaker in my lifetime, and I’m in my early 60s. I’ve never seen a Speaker who has so little control over his people. In fact it’s just the opposite – his people seem to be able to roll John Boehner with a great deal of regularity. If you need any proof of that, just think about the big budget-related votes from last year. On the continuing resolution to prevent a government shutdown, there weren’t enough Republican votes to get it passed and they had to go to Democrats to get it done. The same thing is true for the debt ceiling extension – it required Democratic votes even though Republicans had a majority in the House.