Debt Ceiling Debates: What Happens After The Fiscal Cliff Deal

Investing

The politics of the Congressional wrangling over the fiscal cliff are now clear.  The White House and Democratic Party-controlled Senate conspired to pass a variety of taxation provisions with relatively small spending cuts and then dared Republicans to block it.

The White House and Senate Majority Leader Harry Reid (D-NV) pushed a bill through the Senate to increase taxes on wealthy individuals with incomes over $400,000 year ($450,000 for couples – a huge marriage penalty on the rich) with only 8 Senators voting against.

Senate Minority Leader Mitch McConnell (R-KY) voted for it, along with most of his caucus – basically handing a very bad sandwich over to the Republican House, which then passed the bill New Year’s night.  The President then signed the bill into law.

An Overview Of The Deal

Don’t believe anyone who tells you the Senate package only targets the superrich. According to the Tax Policy Center, 77 percent of Americans will pay more in taxes in 2013 than they did in 2012. The middle quintile of taxpayers would pay some $679 more.

But there are other important items too, for good or for ill (if you want even more detail, the Washington Post’s Ezra Klein spells them all out fully):

  • Top income earners above $400/450k see their top bracket increased to 39.6 percent – permanently.
  • Payroll tax holiday is terminated.
  • Short-term capital gains and dividends tax – raised to 20 percent for those above the $400,000 or $450,000 income level. Everyone else pays 15 percent.  This is a three-fold increase from the 5 percent level for lower income earners under the Bush tax cuts.
  • The intolerable Bush tax cuts are made permanent, except for the high-income threshold.
  • Federal extended unemployment insurance survives into 2013.
  • The Alternative Minimum Tax – permanently fixed.
  • Personal income exemptions and Pease limits are reimposed for higher-income taxpayers, restricting the ability of higher-income Americans to take certain deductions for medical care.
  • The CLASS Act is repealed. This amounts to a rollback of the long-term care portion of ObamaCare, which was an actuarial unsound boondoggle anyway. It was already a dead man walking; the fiscal cliff deal just formalizes the death panel’s decision.
  • Three tax credits of importance to lower-income Americans, the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit, will continue for another five years.
  • The sequester? Spending cuts? They’ll think about that tomorrow.

In this case, though, tomorrow comes in two months – when the new Congress comes to town.

The Debt Ceiling Debate Heats Up: What Will Happen Two Months Down the Road

In two months, if the new Republicans in the House decide to vote the Senate bill forward, Congress will have to wrestle with the sequester provisions and a possible increase in the debt ceiling.

House Republicans, in essence, have chosen their hill to die on – and this wasn’t it. Do they want to take the blame for throwing the country over the fiscal cliff? No. Instead, they are hoping to be seen as the bulwark of sanity in the fight over extending the debt limit – which we are slated to hit around mid-February.

By giving in at the last minute on the fiscal cliff, Republicans indicated they would rather fight it out this spring, and hold the debt limit increase in hand to trade for meaningful spending cuts. For their part, the Democrats are aiming to hold them over the same barrel – pass the debt limit increase, or the puppy gets it!

The bottom line, though, is that the bill passed by the Senate raises almost $10 in taxes for every dollar of spending cuts – the most lopsided deal anyone dared to imagine. The Vice President and Senate Majority Leader have brokered the biggest tax increase we have seen in a generation – and spending hawks have next to nothing to show for it.

Meanwhile, the tax increases are woefully inadequate to cover federal spending unless it is cut substantially. Indeed, the law adds about $4 trillion to the national debt over the next ten years, according to the Congressional Budget Office.

 

 

Debt ceiling image courtesy of Shutterstock.