The Congress and the Fiscal Cliff

Fiscal Cliff Notes

Nov 11, 2012 • Economic Debates, Economic History, Households, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 106 Views    No Comments

There might be 2 ways to look at the fiscal cliff.

Specifically, we can focus on tax increases and spending cuts:

Tax Increases

  1. Bush era tax cuts: expire
  2. 2010-2011 2% payroll tax cut: expire
  3. Affordable Care Act taxes: kick in

 

Spending Cuts

  1. Emergency unemployment benefits: expire
  2. Budget sequester (cuts) from Super Committee failure: kick in
  3. Previously legislated budget cuts: kick in
  4. Defense cuts from Iran/Afghanistan reductions: kick in
  5. Medicare payment rates for physicians: reduced

 

More broadly, we can take a step backward and look at the bigger problems that really have to be solved:

  1. 63% of the 2011 federal budget was on “autopilot.” Debating cuts, the Congress only looked at 37% of spending.
  2. 1 of 4 budget dollars is spent on healthcare. Looking back 50 years ago, less than 10% of all spending was healthcare, and looking forward, we are heading toward 33%.
  3. Slicing federal employees and agencies would save money but not nearly enough. Even if we fired the entire federal payroll, the deficit would dip by less than one third.
  4. Defense spending is massive. We spent 1 out of every 5 dollars on defense in 2011.
  5. We now borrow close to 36 cents for every dollar we spend. And yet still, the more affluent are paying a larger proportion in taxes and the middle of the middle class (as expressed in the video) is paying a lower proportion.

 

Where does this leave us? Defined as taxing, spending and borrowing, US fiscal policy is the real fiscal cliff.

Sources and Resources: The specifics of the fiscal cliff are from a past econlife post while the summary of the big issues is from the David Wessel/WSJ video that follows. For even more detail, this Tax Foundation description of the fiscal cliff is good.



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