By WSJ Staff
The “fiscal cliff,” when a package of spending cuts and tax increases is set to go into effect unless the White House and Congress negotiate an alternative, is fast approaching. Here’s a look at the players, their positions and the fallout if a deal isn’t reached.
The plot. Some things have changed in the American fiscal drama since 2011, writes David Wessel. For one, President Barack Obama is campaigning in public this time to put pressure on the Republicans and spread the view that it’s their fault if the U.S. goes over the cliff. But the plot is very similar: Republicans, particularly Speaker of the House John Boehner of Ohio, continue to balk at raising tax rates, while Mr. Obama and his Treasury Secretary, Timothy Geithner, say they don’t see any alternative to raising tax rates on those with annual incomes over $250,000 if the deficit is to be reduced without eviscerating government programs or raising taxes on the middle class. Here are some proposals for taxing high-income Americans:
Economic forecast. If policy makers don’t act before the end of the year, the economy would contract by 0.5% in 2013, according to economists of the Congressional Budget Office, and the unemployment rate would jump from 7.9% to 9.1% by the end of 2013. If all the spending cuts and tax increases are avoided, CBO forecast the U.S. economy would grow by about 1.7% next year. Here’s a look at the CBO forecast for GDP and employment in fourth quarter 2013 if the fiscal cliff is avoided:
Revenue. The White House’s aggressive public campaign to build support for its approach to reduce the deficit through tax increases and spending cuts came last week as many Republicans appeared to have softened their antitax rhetoric in the wake of the election, with many openly acknowledging that higher taxes will likely be part of any plan to reduce the deficit. Here’s a look at what limiting tax breaks on top earners and what restoring higher rates on top earners would yield in revenue over 10 years:
The tax system. The crying need at the moment isn’t merely to avoid going off a fiscal cliff at the end of the year—but to get beyond that into a serious conversation about how the American government should be funded for the next generation, writes Jerry Seib. The U.S. tax system was essentially created in 1913 and last seriously updated in 1986–before the Internet had any commercial use, before most of us had cellphones, before the U.S. began running $1 trillion annual deficits, before the oldest baby boomers retired and before income inequality had become a global phenomenon.
Reworking the tax code. The White House wants major changes to the tax code as part of any deficit deal, potentially raising revenue from a number of sectors. Click on the image to the left to see which sectors would be affected.
Limiting Deductions. Many residents of more affluent states with higher home prices and state and local taxes would see their tax bill rise significantly if the idea of limiting personal tax breaks gains momentum on Capitol Hill. Both Democrats and Republicans view the idea as a way to raise revenue and shrink the deficit. See average tax deductions and charitable contributions by state based on 2010 IRS data, as well as other measurements of how people pay taxes:
Business pulse. Nearly three-quarters of the chief executives who attended The Wall Street Journal’s CEO Council in November listed the fiscal cliff as their biggest worry on the global landscape. Ninety percent indicated they would favor a package that included at least one dollar in tax increases for every four dollars in spending cuts. Only 33% believe there will be a constructive deficit deal by year end.
Spending. Companies are scaling back investment amid fiscal and economic uncertainty: Capital spending, which helped propel the economic recovery, fell 1.3% in the third quarter from the second quarter as confidence eroded among large corporations. Unless the business investment slowdown reverses quickly, it could weigh further on growth prospects and the stock market.
Personal finance. Many analysts fear the fiscal cliff will threaten the bull market in stocks that began in 2009. Here’s advice from Weekend Investor on how to play the fiscal cliff:
How will you be affected by tax changes? Here are some scenarios for how different groups of people will be affected by the tax changes that will take place if the fiscal cliff isn’t resolved by Jan. 1. A typical single student in the $10,000-$20,000 income range, for example, would face an increase of 37.9%, the second highest among all singles.
Gas tax. States and business advocates are maneuvering to use the budget negotiations to win support for a long-sought increase in the federal gasoline tax. The federal gas tax was last raised in 1993 and 1990, each time as part of a deficit-reduction plan. The government spends roughly $52 billion a year on highway and transit projects, but the gasoline tax is generating only about $37 billion annually. That has created a roughly $15 billion annual shortfall that Congress has filled in recent years by taking money from the government’s general fund.
Medicare and federal spending. The fiscal cliff has revived the idea of idea of gradually raising the Medicare eligibility age to 67 from 65, as the Medicare program is a key focus in negotiations to avert the fiscal cliff. Last year, the program’s net expenditures totaled $486 billion, according to the Congressional Budget Office, or 13.5% of all federal spending.
Deal makers scramble. The threat of losing gains to the tax man has some companies, private-equity shops, venture capitalists and corporate insiders looking to book profits in the waning days of the year. Even if some potential changes are dialed back, tax rates on qualified dividends and long-term capital gains are widely expected to rise for some taxpayers from their current top rates, both 15%.
Estate Tax. Little about averting the fiscal cliff is simple, in part because its many moving parts draw supporters and opponents across the spectrum. While the GOP criticized President Obama’s opening bid for tax and spending increases with limited entitlement cuts, at least three Democratic senators, Sens. Mary Landrieu of Louisiana, Max Baucus of Montana and Mark Pryor of Arkansas, have parted ways with the White House on the president’s call to raise the estate tax as part of a bid to strike a deficit-cutting deal before year’s end. Under the president’s proposal, some 7,500 estates would owe taxes next year, compared with 4,000 if current policy continued, according to an analysis by the Tax Policy Center. If the White House and Congress take no action, the current tax cut will expire, and the rate will rise to 55% next year and apply to assets above $1 million.
Special Dividends. Investors are seeing a jump in the number of companies making big one-time payouts to stem a possible increase to the dividend-tax rate in the new year. Costco, Las Vegas Sands and Whole Foods are among the companies to pay special dividends to get ahead of the so-called fiscal cliff. Dividend-tax rates could increase from 15% to as much as 40% if tax cuts aren’t extended before 2013. Click on the image above to sort through the list of companies that have announced special dividends.
Tax Burden. Harvard University economics professor Martin Feldstein has devised a plan that he says could raise considerable revenue for the government. The Feldstein proposal would limit the value of a household’s combined tax breaks to a specific percentage of its income—for example, 2% or 5%. Here’s how it would work: Suppose a household earns $1 million in income and has $100,000 in itemized deductions and other breaks, and pays tax at the top rate of 35%. Shielding $100,000 from tax reduces the household’s tax bill by $35,000—or 3.5% of its income—all things being equal. If enacted at 2%, the Feldstein proposal would limit the value of the household’s tax breaks to $20,000, boosting its tax bill by $15,000. Other approaches abound. (See the chart above and read more.)
Hmmm. My typing got out of sync with my thinking.
…recovery will at best be more difficult and perhaps impossible, or more difficult and perhaps not possible. The combination of “not impossible” is an error.
Spending cuts (real ones, not from some future baseline or other figment of the imagination) is the real requirement.
If there will be no spending cuts, raising taxes would simply give BO and cohorts more money to spend, which they would promptly spend and call for more. Better to go over the cliff, or hit the wall, or go into the ditch (whatever you wish to call it) now, rather than later.
If we crash and burn now, we might be able to recover later. If we continue on the present course, we will crash and burn, and recovery will at best be more difficult and perhaps not impossible.
I am seeing reports that Europeans and Asians are increasingly recognizing China as the world’s top economic power. Not in the future. Now. Look at BO’s spending plans, and it is very easy to see why.
So hike more tax for men who earn a living and pass than on to illegal immigrant babies and parents and not to speak of the worthless people entering by Green Card lottery? Eh?
Raising my taxes in any way will not help my 300 employees – I am certain of that.
If Obama was so against giving money to gas and oil companies why hasn’t he ended it? If Obama was so concerned about the deficit why hasn’r he proposed spending cuts? The same goes for all these congressmen and senators. This circus is just the usual talking in generalities and trying not to get specific because that might lose someone votes. We NEED SPECIFIC PLANS including cuts and increasing revenue (starting with congrs and senate budgets) because we not only have to fund a multitrillion dollar government but cover the 16 trillion dollar debt. Cutting a trillion or even two over ten years won’t hack it. We need to cut a trillion dollars out of the budget TODAY and increase taxes both down and up so that even those at or near the poverty level pay at least 5%. CUT government programs and even whole agencies. Cut the DEA, raise the social security retirement age, raise the medicare age and reduce what it covers, scrap the most expensive parts of Obamacare or delay them until the debt is paid, cut congress and senate pay to $1 a year until this is solved (president also), stop subsidies to all businesses and end foreign aid except for emergency assistance. Pull all our troops out and stop spending on wars and reduce the defense budget by half what the fiscal cliff would have done. Reduce regulations on gas and oil exploration and some of the stupider EPA regulations, also give education and marriage back to the states and eliminate the majority of the education department, DO NOT create a new secretary of “business”, reduce government payroll and above all let the american people know that you realize it is THEIR money and not “the governments”. This would be a start and it may end us in a depression but what is the alternative? Keep spending until we are all broke and the country bankrupt? They way they spend you would think they had a magic Unicorn that produced it out its butt.