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July 25, 2014

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The fiscal cliff con game

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Whatever the ultimate shape of the “fiscal cliff” solution that has preoccupied all of Washington, and a fair swath of the country, in the final days of 2012 and into the new year, Americans should be asking themselves this question: How do we like being conned?

The deal, passed by the Senate on New Year’s morning, was made final late Tuesday when the House of Representatives signed on. Its essential elements include expiration of the President George W. Bush-era income and capital gains tax cuts on couples’ incomes over $450,000, and a modest increase in the estate tax.

Unemployment benefits and tax credits for lower-income families will be extended. The payroll tax holiday that replaced a low- and middle-income tax credit in 2009 will end, but the tax credit won’t return. Many other items, including the fate of automatic spending cuts mandated by the 2011 debt-ceiling deal, are being put off for weeks or months. Another debt-ceiling fight looms on the near horizon.

Almost everything mentioned above involves a con game of one sort or another because almost none of it is what it seems on the surface. Since such fakery is certain to continue well into the new year, here’s a quick guide to its basic features.

•••

The deficit con: The big daddy. Despite lawmakers’ claims that the debate has been about closing the federal deficit and reducing the federal debt, none of the negotiating over the past weeks has dealt with those issues. Indeed, the tax and spending package will widen the deficit by some $4 trillion over 10 years, compared with what would happen if the tax increases and spending cuts mandated by existing law were implemented.

The House Republican caucus has consistently looked for ways to protect high-income taxpayers from a tax increase, at the expense of beneficiaries of government programs such as enrollees in Social Security and Medicare. If there’s a dominant preoccupation with cutting the deficit lurking somewhere in that mindset, good luck finding it.

•••

The shared sacrifice con: If the goal has been for an approach to deficit cutting balanced among economic strata — and Democrats and Republicans both pay lip service to this notion — then the final deal is a fraud. Every working person earning up to $113,700 in wages this year will shoulder an instant tax increase of 2 percent. That’s because the payroll tax holiday enacted in 2010 is expiring.

The tax holiday, which cut the employee’s share of the Social Security tax to 4.2 percent from 6.2 percent of income up to the annual wage cap, always was designed as a temporary stimulus measure. But few people expected that it would expire at a single stroke — and without a countervailing working-class tax credit to soften the blow.

Monkeying with the payroll tax was never a great idea, because it undermined Social Security’s essential funding mechanism. But what’s often forgotten is that the holiday was implemented to replace an existing tax break for the middle class — the Making Work Pay credit — opposed by the GOP. But the credit isn’t coming back, so the end of the holiday means a pure tax increase on the 98 percent of working Americans earning $113,700 or less in wages. For a couple touching, say, $80,000, the increase will come to $1,600.

Compare that with the break reaped by taxpayers declaring income in the $250,000 to $450,000 range. That’s the difference between the threshold at which President Barack Obama proposed restoring pre-Bush tax rates and the level enacted by Congress. Exempting that slice of income from higher taxes saves up to $9,200 in taxes for families earning $450,000 or more (depending on the cost of phaseouts of exemptions and deductions for those taxpayers).

•••

The estate tax con: There’s no purer giveaway to the wealthy than this. The final deal raises the tax to 40 percent from 35 percent on estates over $10 million. (That figure is for couples, whose estates are each entitled to a $5 million exemption upon their deaths.) The alternative was to return to 2009 law, which set the tax at 45 percent on couples’ estates more than $7 million.

Who pays the estate tax? In 2011, about 1,800 taxpayers died leaving estates of more than $10 million. Their average estate was somewhere from $30 million to $40 million. Their heirs cashed in on some of the most nimble tax planning on earth: Although the statutory top rate was 35 percent, the average rate on estates of even $20 million-plus (the average gross value of which was $65 million) came to only 16.2 percent.

Estate-tax bonus babies long have been protected by the myth that the tax falls heavily, and unjustly, on small family farms and businesses. The Washington-based Tax Policy Center found, however, that fewer than 50 small farms and businesses paid any estate tax in 2011. Their liability came to less than one-tenth of 1 percent of the total collected. On the other hand, more than 50 percent of the estate tax was paid by people whose income placed them in the top tenth of 1 percent of all taxpayers. These are the people protected by estate tax opponents.

•••

The debt ceiling con: The origin of this con is what put us at the fiscal cliff in the first place, for the automated spending cuts being dealt with now were put in place as the GOP’s price to raise the federal debt ceiling and stave off a government default in 2011. The debt ceiling was not designed as a constraint when it was created in 1917 — it was convenient blanket authority for the Treasury to issue debt so that Congress wouldn’t have to vote permission each time a new bond had to be floated.

Approval was always routine — the limit was raised 91 times between 1960 and the showdown in 2011. Now it’s a hostage-taking situation, destined to return in the next month or two when Republicans who didn’t get what they wanted in this week’s cliffhanger menace the creditworthiness of the U.S. again.

For a brief shining moment, President Obama dreamed of folding an end to the debt limit into a fiscal cliff deal, but that didn’t happen. The idea that the debt limit discourages fiscal irresponsibility is a scream. It doesn’t now, and never has, stopped Congress from enacting any spending plan or tax break it pleases, creating a budget demand that has to be paid for with, yes, debt. If Congress wants less debt, it can cut spending or raise taxes. The debt limit is a dangerous weapon in the hands of irresponsible legislators, and it’s time to take it out of their hands.

•••

The bond vigilante con: This is the bedrock con that fuels deficit hawkishness. The idea is that if America doesn’t get its debt under control, it will be punished by unhappy bond investors worldwide. U.S. interest rates will soar and the standard of living will plunge.

This con depends on voters overlooking that it hasn’t happened. U.S. government bonds remain the most sought-after in the world. Remember August 2011, when Standard & Poor’s cut America’s credit rating because of poor fiscal policy and dysfunctional government? Neither condition has improved, but the yield on the 30-year Treasury bond has fallen from 3.75 percent to 2.82 percent and on the 10-year note from 2.14 percent to 1.68 percent.

The bogeymen of higher interest rates and inflation that are supposed to follow inevitably from our current level of deficit spending have simply not materialized, and aren’t visible on the horizon. Moreover, history suggests that more typically they’re responses to vigorous economic growth, not to policies aimed at reviving recovery.

That’s a clue that the whole fiscal cliff affair is a major con. There is no reason for the country to suffer now the austerity embodied in the spending cuts and tax hikes that were to come due Jan. 1; what’s needed is continued stimulus to complete the economic recovery. Indeed, the starkness of the Jan. 1 deadline is itself a con — nothing except its own inaction prevents Congress from temporarily moderating the effects of the cliff by voting to defer tax increases and spending cuts, as it did this week.

In the golden age of individualistic rural America so beloved of today’s conservative dreamers, people who perpetrated cons such as these would be tarred, feathered and ridden into the sunset on a rail. Today we allow them to set the agenda in Washington. Is that supposed to be progress?

Michael Hiltzik is a columnist for the Los Angeles Times.

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  1. The "Fiscal Cliff" is just another means for the Repugnants extending welfare to the corporations and the wealthy. The Nascar 70 Million Dollars is just the tip of the iceberg. When I read the bill I realized all it did in reality was extend tax relief for big money.
    I listen to McConnell whine about spending after the Repugnants put that through and I cannot believe it.
    I do not believe spending is as big a problems as politicians try to make us believe. If our politicians worried about getting revenue from these corporations and businesses instead of granting tax exemptions for every business that contributes to their campaigns. We would not be in the fiscal mess we are in.
    The Repugnants want us to believe that Social programs are the root of all evil, well,they may be but the welfare programs (tax breaks) for the wealthy are the real culprit. If their is any reform to be done it should be done to our tax code first.
    This Fiscal Cliff fiasco cost taxpayers a considerable amount and Repugnants complain about spending and taxes while they are the major violators.
    IF YOU REQUIRE FACTS, READ THE BILL!

  2. An interesting take on the immense issues of taxation and apending, and I tend to agree that American politicians have ulterior motives, their own re-election always being prominent in their actions.
    I part company with this writer, however, when he argues that austerity itself is a giant con and fiscal stimulus is the way to proceed.
    The accumulated government overspending appears to have reached a critical level at which in my opinion only a combined approach of real lower spending, tax hikes, loophole closures, and prolonged austerity can overcome the fiscal problems of America. It would be a nice bonus if all of the above could also be accomplished without triggering a recession, but that is highly unlikely. A booming economy alone can no longer solve America's long-term fiscal difficulties.
    It astounds me that so many Americans view taxes of any sort as some form of theft.
    I have zero confidence that your politicians will do anything useful over the next four years.
    Unless America intends to declare bankruptcy at some point and shaft the world's creditors, the status quo is not a viable option.

    Donald W. Desaulniers

  3. Mr. Desaulniers. "Austerity" was attempted in Great Britain recently with disastrous results. The Prime Minister reversed course on that to prevent another recession. Austerity is code for "drowning the government in a bathtub"....an outcome that would please the "anti tax pledge" creator, Grover Norquist. It is a shared goal of the GOP, who, almost to a man have signed on to Norquist's pledge in the Congress of the United States. The GOP is the party of the rich, corporations and GROVER NORQUIST. The 112th Congress set the standard for incompetence and inefficiency. The 113th Congress will be more of the same: Gridlock, faux "crisis" and obstructionism...."meet the new boss, same as the old boss".

  4. Well, just what are O's priorities. Will he continue the welfare state or will he "concentrate" on worldwide equality at our expense, forever our expense?