The Fiscal Cliff debacle is over, thank goodness. Unfortunately, taxes went up on everyone with earned income and doubly so on the top 0.7%. This is because the Social Security portion of the FICA tax, a flat tax on individuals’ first $113,700 was increased by from 4.2% to 6.2%. In theory, FICA funds Social Security and Medicare. In addition, the marginal income tax for income earned over $400,000 (for individuals) jumps all the way to 39.6% from 35%. Explained below…
That being said, the fiscal cliff deal is not a complete flop for the nation’s income statement or its citizens. Here’s why. While the increase in taxes won’t do much to help revenue (depending on where you believe we currently lie along the Laffer Curve), the automatic sequestration cuts weren’t stopped, they were just delayed until March (the two month delay cost $24 billion).
… [the fiscal cliff deal] cuts spending by about $900 billion over ten years — as all but $332 billion of the $1.2 trillion in scheduled sequester cuts are still set to kick in. (Of course, 10-year projections and $1.85 will get you a cup of coffee at Starbucks.) So, by this measure, the deal involves about a 3-to-2 ratio of spending cuts to tax hikes.
While Democrats had the upper hand in the Fiscal Cliff debate, Republicans should have the upper hand in the debt ceiling negotiations. This is because Democrats will be fearful of automatic spending cuts and a potential shutdown the government (though Republicans fear the spending cuts to National Defense).
Consider this… Which party do you think was more fearful of a large increase in income tax rates? The GOP of course, and that’s why they had more to lose in the fiscal cliff debate. Conversely, who do you think is more fearful of a government shutdown and missed payments to government programs such as unemployment insurance? Most would say the Democrats. So you can see why the Republicans will have so much more leverage when the debt ceiling debate invariably gets nasty.
With that in mind, Republicans need to use their leverage to make meaningful entitlement cuts. Social Security and Medicare are the largest and third largest outlays for the federal government, respectively. Any politician who is unwilling to touch them, is not serious about fixing our budget deficit. A place to start may be slowing inflation adjustment for Social Security and increasing the minimum age for Medicare. This absolutely shouldn’t be a clashing point between parties. Unfortunately, it probably will be, as Mrs. Pelosi has already said she wants more tax hikes, likely in lieu of serious spending cuts. Republicans almost surely won’t make that trade, and President Obama says he will not negotiate at all. It’s hard to understand… There will be another clash in Congress this March, and their approval ratings will have to find something worse than root canals and lice to be less popular than.
What’s the solution? Leave your thoughts in the comments below.
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