Simple Graphic Explaining Fiscal Cliff

USA Today put together an amazing graphic explaining the fiscal cliff.  we encourage any curious minds to take a look:

Simpson Bowles on Taxes

Any plan that congress agrees on to avert the fiscal cliff must include some sort of tax reform.  There is little way around it.  The politicians tend to skirt the issue, we need to have a grown up conversation about how to improve our tax code.  We can make it simpler, and we can make it fairer.  There won't be any magical plans that promote 10% GDP growth and eliminate all debt by 2015.   It's just not going to happen.  What can happen though, is small steps in the right direction.  The Simpson-Bowles plan makes such a step, pushing the dialogue forward on meaningful tax reform.

Below is a graphic illustrating the Simpson Bowles plan on taxes.

While the above chart might seem complicated, we've set out to describe, in simpler terms, the major elements of the Simpson-Bowles tax proposal.

First off, the Simpson-Bowles plan eliminates the Bush era tax cuts for the wealthiest Americans.  This is done before changes are made to the tax code.  The elimination of these breaks are built into its baseline.

Additionally, there are a lot of tax increases in the Simpson-Bowles plan.  This is necessary to make any large scale dent in the debt.  As a balanced approach, the revenue increases and spending cuts are roughly equal.  The Simpson-Bowles plan also taxes dividends and capital gains as normal income.  This basically results in a huge tax increase for the rich, who hold more of their wealth in stocks and would be taxed more in capital gains and dividends.  Therefore, the Simpson-Bowles plan is able to lower the actual rate while still maintaining equity in taxation.  The Simpson-Bowles plan also significantly cuts deductions for taxes, which allows it to lower some overall rates while still getting revenue increases.  The difference is that people would be paying a higher percentage of their income, because they have less deductions from the baseline rate.

The Simpson-Bowles also recommends raising the gas tax by 15 cents.  While this would undoubtedly hurt some Americans who need gas for travel, work, etc, It could be a much needed revenue booster and a way to get on the right track for green energy.  Americans consume a lot of gasoline, so having a gas tax increase could dramatically increase the revenue into the government's coffers.

We'll have more on tax reform tomorrow.

Fiscal Cliff: Part 2-Taxes

If Congress does nothing to act on the expiration of the Bush Era tax cuts, many will see a modest rise in the amount of taxes they must pay.  When planning for the future and trying to work a deal, Congress must balance cutting the deficit with economic recovery, as raising taxes would lead to a decrease in consumer spending, the principle part of Gross Domestic Product (GDP).

In order to balance spending cuts, increased revenue must be on the table for a fiscal cliff deal.  In order to get enough revenue, limiting deductions and raising taxes on millionaires is necessary.

In the campaign this year, Mitt Romney championed limiting deductions as a way to make his proposed tax cuts revenue neutral.  If applied to the fiscal cliff, we can use these same limits on deductions to increase the revenue that the government is able to collect.  Capping total deductions at $50,000, according to the Tax Policy Center, would raise around $750 billion over a ten year period.  Deductions would actually hurt the richest Americans the most, leaving middle class America unscathed.  80 percent of additional revenue would come from top earners in the 1%. Some deductions that are on the chopping block specifically appeal to rich Americans, as you can see in the table below of prospective plans.  A tax break for corporate jets is such a deduction.  Working with the deduction system could bring in even more money, though it would hurt more Americans in the process.

Another option is to increase personal income taxes to the pre-Bush tax cut levels.  This would make a modest dent in the deficit, so more revenue is obviously needed.

All in all, we need a balanced approach on revenue increases just like we need a balanced approach on the whole fiscal cliff crisis.  Congress needs to make sure that it is not unduly hurting anyone, especially the middle class and the poor.  We're not out of the woods yet, with our economy in a sluggish recovery.  Prudent fiscal policy is just what we need to continue or recovery and make a dent in our debt for the future.

The Fiscal Cliff Series: Part 1

The term "Fiscal Cliff" is used to describe the problem faced by Congress at present.  A combination of tax cut expiration and automatic cuts will take effect come January 1st if a plan is not produced to avert the situation.  

Because of Congress's failure to come to an agreement in accordance with the Budget Control Act of 2011, which raised the debt ceiling but left open the ways to cut deficit spending.  Since a bargain was not reached, sequestration will occur, which mandates across the board spending cuts.  In addition, the Bush era tax cuts will expire, as will a 2% Social Security Payroll tax cut, and the expiration of federal unemployment benefits.

If Congress doe snot act, as before, the results could be very grim for our country's growth.  It will have a very detrimental effect on an economy that is still shaky.  

The effect of the Fiscal Cliff on GDP

As you can see above, analysts have projected strong negative effects on our nation's GDP if  we run over the Fiscal Cliff.  The Tax Policy Center has stated that middle income families will pay, on average, $2,000 more dollars in taxes in 2013.  The Congressional Budget Office (CBO) also anticipates increased unemployment  where 3.4 million will lose their jobs.

That being said, the country cannot continue on the path it's on with regards to deficit spending.  at least something needs to be done to curb our spending so that we get back on a sustainable debt track as our economy begins to rebound.  Large deficit spending should really only be done it trying economic times, and we should try to steer clear of that now.

The effect of the Fiscal Cliff on Deficit

Now, as we consider the negative effects of the fiscal cliff on growth, we should also note that it would drastically decrease our spending and cause us to run fewer deficits.  The CBO baseline in the figure above shows that effects of the fiscal cliff.  The blue alternative would be the effect of repealing the automatic cuts and extending the Bush Era tax cuts.  Though this also reduces deficits, at least for a while, more would need to be done to put our nation on the track of long term sustainability.  We'll discuss possible solutions to this problem in following posts.