Friday, January 18, 2013

Fiscal Follies: We have been conned again

To paraphrase Rudyard Kipling: If you can keep your head when all about you are losing theirs, perhaps you have misjudged the situation. Remember when the Congress kicked the fiscal can down the road by creating a joint committee to resolve the debt ceiling crisis of 2010? The committee was to reduce the federal deficit by $1.2 trillion over a ten year period. Mind you, that is $120 billion a year while the deficit is $1.3 trillion a year. This amounts to only $55 b is annual cuts for both defense and non-defense. So what the Congress was fighting over is a deficit that would still be in excess of $1 trillion after the "reductions". So to quote Stevie Wonder "whats the fuss"? I am reminded of the saying that the fights in academics are so fierce because the stakes are so small. The same is true for politics. The cuts could only occur in "discretionary" spending. But the majority of the budget is "non-discretionary". Of course, non-discretionary can be changed to discretionary if the congress so chooses. For example in FY 2013 $3.8 trillion dollar budget Non-discretionary spending: (65%) $820 billion (22%) Social Security payments $811 billion (21%) Medicare/Medicaid/SCHIP payments $246 billion ( 6%) interest on the National Debt $583 billion (15%) other ‘mandatory’ payments This totals to $2.5 trillion in "non-discretionary" spending. During the fiscal year, receipts are "only" $2.9 billion leaving $400 billion to fund the rest of the government. Look at discretionary spending: Discretionary spending: (35%) $700 billion (18%) national defense ($55b is 7.8%) $565 billion (15%) other ‘discretionary spending’ ($55b is 10.3%) $ 97 billion ( 3%) Overseas Contingency Operations Needless to say the total of $1.36 trillion is a wee bit more than $2.9 billion or for that matter the puny $120 billion that the congress found impossible to cut. In their infinite wisdom, the "fiscal cliff" was averted by increasing taxes while postponing the sequestration of funds until March 2013. The deal passed by the congress only addresses the revenue side and ignores the sequestration of the $120 b postponing it until March. The key elements of the deal are: 1. reinstatement of the payroll tax by two percentage points to 6.2% for income up to $113,700 2. reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000 (which entails the top rate reverting from 35% to 39.5%). 3. increase in the tax on investment income from 15% to 23.8% for filers in the top income bracket and a 3.8% surtax on investment income for individuals earning more than $200,000 and couples making more than $250,000. 4. Limiting deductions for incomes over $250,000 for individuals and $300,000 for married couples. The legislation would raise roughly $600 billion in new "revenues" over 10 years, according to various estimates. (That is $60 b per year which is also a wee bit less than the $1.36 trillion mentioned above). Federal "revenues" are typically 18 percent of GDP regardless of the tax code. Now its about 16 percent because of the recession. CBO estimated that the new changes would cause "revenues" to increase to 19.8 percent of GDP over the next three years. But those figures assume an increase in economic growth going forward. The deficit con: The Congressional Budget Office estimates that current plan includes $330.3 in new spending during the next ten years, and it will increase the deficit by $3.9 trillion in that time period despite raising taxes on 77.1% of U.S. households. Bloomberg reports, "More than 80 percent of households with incomes between $50,000 and $200,000 would pay higher taxes. Among the households facing higher taxes, the average increase would be $1,635. If the current laws slated for 2013 had become law, the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion - leaving the deficit at around $1 trillion. Essentially what this means is that the deal actually increases the deficit my more than if we went over the so-called fiscal cliff. Of course, we haven't attacked spending yet, but I am taking bets that I know the outcome already. So the last hope lies in saying no to the increase in the debt ceiling coming in March. Last time, the press screamed that not increasing the ceiling would result in the government defaulting. The president said that social security checks might be delayed. Of course both are wrong. There are enough incoming tax receipts to pay the principal and interest payments on the debt, to pay social security, medicare and the military. Sen. Pat Toomey (R-PA) actually introduced legislation in 2010 that would mandate that these be paid and the cuts come elsewhere. The press and the president were simply resorting to scare tactics to force an increase in the ceiling. As it stands, the debt ceiling is the only realistic barrier to increased spending. The government could no longer spend by borrowing more and more. We have seen that the congress does not have the will to decrease spending no matter how small. The spending will only be limited if the republicans in the House heed Nancy Reagan with regard to the debt ceiling and "just say no."

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