Fiscal Cliff Deal

[Bonam]

So the US came to a "fiscal cliff deal", summarized here:

http://www.washingto...al-cheat-sheet/

Highlights:

- income taxes go up on people making over 400/450k (35% -> 39.6%)

- taxes on investment income for those making over 400/450k goes up (15% -> 20%)

- estate tax goes up from 35% to 40%

- payroll taxes on employees go from 4.2% to 6.2%

- some deductions/exemptions for people making over 250/300k are removed

Altogether, the estimate is about $600 billion more revenue over next 10 years as compared to if the 2012 tax rates had continued. No significant cuts included in the deal, but the cliff has been kicked two months down the road at which point the issue of cuts will have to be addressed.

A good graphic of the offers and counteroffers along the path to what we ended up with:

Based on the graph, Obama got about half the tax increases he wanted, but no cuts were done. But the cuts will still have to be done since we still have a "half cliff" coming up in 2 months, as well as the debt ceiling, which the Republicans will once again use for leverage.

Any thoughts on the deal?

Personally, I think this deal will be the entirety of the tax increases. I don't think Republicans will allow any further tax increases to pass, so $620 billion is all Obama will get. So what's left is spending cuts. Republicans I think threw away the chance to do $925 billion in spending cuts in Obama offer #3, and I don't think the democrats will offer cuts on that scale again, we'll probably end up with something closer to the $600 billion in cuts in Obama's first offer when the next deal is done 2 months down the road.

In total, that's about $1.2 trillion over 10 years or about $120 billion annually, which reduces the US annual deficit from $1.4 trillion to $1.28 trillion, only about 10% of the way to a balanced budget...

Edited January 2, 2013 by Bonam

[Argus]

I think Obama showed again what a weakling he is. The fact is that even with tax increases there were going to have to be cuts. By bowing to most Republican demands, those cuts will have to be much bigger. He should have let the US go over the so-called fiscal cliff. He then would be in a position to bring a bill for tax cuts to the house, and dare the Republicans to vote it down. That deal should have been for the tax cuts to only affect Americans earning under $100k. And as for capital gains and dividends. They should have risen progressively by income. By the time you're earning over $100k in investment income you should be paying full tax rates, just as you used to. Now he's lost his biggest weapon. When the Republicans come back they're going to demand Medicare and Medicaid be shredded. After all, they don't need these programs, nor do their wealthy patrons. I am predicting right now that the two sides will come to no real agreement by the February deadline for the debt ceiling, and much of the US government will have to be shut down at that time.

I mean, honest to Christ, who in their right mind thinks people earning $250,000 a year need tax cuts, much less those earning $450,000?

[Bonam]

I think Obama showed again what a weakling he is. The fact is that even with tax increases there were going to have to be cuts. By bowing to most Republican demands, those cuts will have to be much bigger.

I'm not sure I see it that way. Obama got a good chunk of the tax increases he wanted, while Republicans got none of the cuts they wanted, and any cuts will be decided in future negotiations. How did he "bow" to Republican demands?

[dre]

I would have held out for Obama 1, 2, or 3.

[dre]

How did he "bow" to Republican demands?

Seems like he basically accepted plan B.

[Moonlight Graham]

Seems like he basically accepted plan B.

And who proposed Plan B?

[geoffrey]

Let's not get ahead of ourselves, this isn't a real fix... this is a delay until the debt ceiling debate. The GOP didn't have a great deal of leverage here, Obama knew the fiscal cliff wasn't the 'end of the world.' He could have delayed, and then played it as though the GOP was responsible for the tax increases.

Now, this all comes back in a few weeks, and in this case, the GOP has the bargaining chips to extract their pound of flesh. Does Obama want to be the first President to default on debt? Nope. Way more power rests with the Tea Party/right wing of the GOP than did just a few days ago. They'll get what they want now.

[Bonam]

I would have held out for Obama 1, 2, or 3.

Yeah personally I think the GOP was unwise not to go for Obama #3 or come back with a Boehner #3 somewhere in between Boehner #2 and Obama #3. Prior to the plan B thing, it seemed like the proposals for both sides were converging rapidly.

[cybercoma]

I mean, honest to Christ, who in their right mind thinks people earning $250,000 a year need tax cuts, much less those earning $450,000?

But they create jobs, so they're doing their part. The people that work those jobs need to do their part and pay up. *sarcasm*

[Bonam]

But they create jobs, so they're doing their part. The people that work those jobs need to do their part and pay up.

Well, a large part of the revenue increase is actually coming from raising the payroll tax on employees from 4.2% to 6.2%. So the people that work those jobs will indeed be paying up, just under $1,000 more annually for an average income earner. Here's the deal's effects on taxpayers at various income levels:

Those making 200-400k actually make out the best, since they are less affected by the increase in social security payroll tax (which is capped at 110k income) but do not get hit by the increased income tax in the top bracket.

Edited January 3, 2013 by Bonam

[bush_cheney2004]

Well, a large part of the revenue increase is actually coming from raising the payroll tax on employees from 4.2% to 6.2%. So the people that work those jobs will indeed be paying up, just under $1,000 more annually for an average income earner. Here's the deal's effects on taxpayers at various income levels:

IIRC, that's just the end of Obama's payroll tax holiday. FICA (and Medicare) payroll takes should be at the higher level.

Those making 200-400k actually make out the best, since they are less affected by the increase in social security payroll tax (which is capped at 110k income) but do not get hit by the increased income tax in the top bracket.

Agreed.....income more than about $107,000 is not subject to FICA taxes. Frankly, I wish all income tax rates had been restored to Clinton era levels, leaving capital gains at 15%. My wife and I are having trouble finding ways to spend the extra money !

Thanks for the splendid graphics.

[Bonam]

IIRC, that's just the end of Obama's payroll tax holiday. FICA (and Medicare) payroll takes should be at the higher level.

Yep, it is. And I agree it needed to happen. If we are gonna have a silly pyramid scheme like social security, the contribution rate for it needs to be sufficient for it to not need extra cash infusion from general revenue.

Agreed.....income more than about $107,000 is not subject to FICA taxes. Frankly, I wish all income tax rates had been restored to Clinton era levels, leaving capital gains at 15%.

I dunno, I think capital gains, dividends, and other investment income realized by individuals should be taxed at their marginal income tax rate. I don't see a compelling reason to treat such income differently than employment income. The argument that such taxes would constitute "double taxation" doesn't sway me, since double taxation is already widely present in other contexts (such as paying sales tax on things you buy with your post-income-tax income). Nor do I think people will substantially reduce investment if investment taxes are increased to their marginal rates. If you have a profitable investment strategy, it doesn't make any sense to keep your money in reserve when you could be making profit, whether the government takes 15% of that profit, 20%, or 39.6%. It doesn't even change the risk calculation for investment, since any capital losses you incur can be used to offset any capital gains.

My wife and I are having trouble finding ways to spend the extra money !

Transfer it to me and I'll put it to good and productive use, I promise.

[bush_cheney2004]

I dunno, I think capital gains, dividends, and other investment income realized by individuals should be taxed at their marginal income tax rate. I don't see a compelling reason to treat such income differently than employment income.

In general, if government wants more of something...tax it less. If you want less....tax it more.

Lost in all this political theatre is the realization that Bush tax cuts are now a permanent fixture for most taxpayers. The Republicans have their victory even if it seems they lost the battle. Without spending cuts, deficits will still loom large.

Edited to add that the much hated Death Tax now seems to exclude the first few millions, helping small business and farmers keep wealth in the family.

Edited January 3, 2013 by bush_cheney2004

[geoffrey]

In general, if government wants more of something...tax it less. If you want less....tax it more.

It goes beyond that. The money you or I invest has already been taxed when we earned it. Then we put it to work for the broader economy in exchange for a return. You should also note that this return is taxed already at the corporate level... Then its taxed again. The combined tax rate on corporate earnings once they flow back to the taxpayer (in the U.S.... less so in Canada) is actually HIGHER than what any common wage earner pays. Why should wage slaves be taxed less than those that create the jobs for the wage slaves? It makes no sense. You talk about disincentives, which are important, but it's already a very unjust system.

Those that tend to suggest higher capital gains or dividend tax rates (or claiming that they should be taxed at marginal rates) are those with a defined benefit pension or haven't put their personal capital at risk in a substantial way. It's not the same as employment income at all. You can LOSE. You take risk. You create jobs and wealth. It's not like cashing your biweekly stipend. And it shouldn't be taxed as such.

[TimG]

The argument that such taxes would constitute "double taxation" doesn't sway me, since double taxation is already widely present in other contexts (such as paying sales tax on things you buy with your post-income-tax income).

The double taxation problem can be best seen with a small business with one shareholder/employee. Under the current system it makes no difference to pay out earnings as dividends or salary - the total tax payable is exactly the same because dividends are taxed at a lower rate to compensate for corporate taxes. If dividends were taxed at the marginal rate it would make no sense to pay dividends - all earnings would be best distributed to the shareholders as salary. This, in turn, creates an incentive to structure a small business with investors as 'employees' which would impact the type of businesses that get funding and potentially make it harder to access sources of capital from 'arms length' investors.

IMO, the tax system should be structured in a way to minimize perverse incentives and a lower dividend tax rate does make the system more balanced even though it is not immediately apparent to people who don't have experience with it.

Edited January 3, 2013 by TimG

[Bonam]

The double taxation problem can be best seen with a small business with one shareholder/employee. Under the current system it makes no difference to pay out earnings as dividends or salary - the total tax payable is exactly the same because dividends are taxed at a lower rate to compensate for corporate taxes. If dividends were taxed at the marginal rate it would make no sense to pay dividends - all earnings would be best distributed to the shareholders as salary. This, in turn, creates an incentive to structure a small business with investors as 'employees' which would impact the type of businesses that get funding and potentially make it harder to access sources of capital from 'arms length' investors.

Salaries are an expense. The amount of profit left to be taxed is calculated after salaries are paid. The same should be true for dividends. And then those dividends should be taxed at the marginal rates of the individuals receiving them. Problem solved.

[geoffrey]

Salaries are an expense. The amount of profit left to be taxed is calculated after salaries are paid. The same should be true for dividends. And then those dividends should be taxed at the marginal rates of the individuals receiving them. Problem solved.

So you believe in the elimination of corporate tax?

[The_Squid]

So the Bush tax cuts ($2+ trillion) that were supposed to magically pay for themselves didn't actually pay for themselves??? That's shocking....

[TimG]

Salaries are an expense. The amount of profit left to be taxed is calculated after salaries are paid. The same should be true for dividends. And then those dividends should be taxed at the marginal rates of the individuals receiving them. Problem solved.

You are correct - but it would mean a huge tax cut for corporations which would get the left howling even more (you are effectively saying corporations should pay no tax). Edited January 3, 2013 by TimG

[Bonam]

You are correct - but it would mean a huge tax cut for corporations which would get the left howling even more (you are effectively saying corporations should pay no tax).

No I don't think I am. Any money they give out as divided would be taxed, just on the other end. It's an accounting difference, not a tax cut. And any money they don't give out in dividends but still claim as profit (for example building up a cash reserve) would still be taxed. Many companies don't pay dividends at all and instead focus on growth.

[dre]

No I don't think I am. Any money they give out as divided would be taxed, just on the other end. It's an accounting difference, not a tax cut. And any money they don't give out in dividends but still claim as profit (for example building up a cash reserve) would still be taxed. Many companies don't pay dividends at all and instead focus on growth.

I think you would lose a fair bit of revenue if you did this.

[dre]

Even republicans cant stand the moronic members of the republican house majority....

www.cnn.com

Watch Chris Christie destroy the house GOP.

Quote from another republican... Peter king.

They raised millions of dollars in New York City and New Jersey, they sent Governor Christie around the country raising millions of dollars for them. I’m saying, anyone from New York and New Jersey who gives one penny to the Republican Congressional Campaign Committee should have their head examined.

Christie...

The house GOP replaced "politics for the oath to serve our citizens".

Edited January 3, 2013 by dre

[TimG]

No I don't think I am. Any money they give out as divided would be taxed, just on the other end. It's an accounting difference, not a tax cut.

You are correct in principal but this accounting difference would reduce corporate taxes and increase income taxes. These kinds of shifts - even if revenue neutral - generate howls of protest from the large number of people who think that corporations are cows to be milked. Edited January 3, 2013 by TimG

[blueblood]

This deal kicked the can down the road and didn't fix anything but raid rich people's bank accounts.

It's a terrible message to send - keep acting irresponsibly, someone else will pay for it.

[The_Squid]

This deal kicked the can down the road and didn't fix anything but raid rich people's bank accounts.

It's a terrible message to send - keep acting irresponsibly, someone else will pay for it.

Hyperbole at its best! Oh those poor rich people!