Let’s start off the week with a few interesting pictures re the impact of the fiscal cliff.
The Tax Policy Center has a new paper out showing the impact of the many tax increases that comprise by far the lion’s share of the fiscal contraction from the cliff—over $500 billion in higher taxes would kick in next year, according to the TPC.
Changes in the tax code have very different impacts across the income scale, depending on who’s targeted, e.g., the EITC vs. the preferential tax treatment for capital gains. So the TPC usefully breaks out the important changes and who, by income class, gets dinged.
For the lowest income households, the loss of tax credits expanded by the 2009 Recovery Act (and since extended) like the EITC and the Child Tax Credit, are most important. But the expiration of the payroll tax cut—a cut of over $100 billion next year and a loss of $720 to the average household next year (and $940 for working households)—hits everyone. For families in the middle three fifths, you can see the dominant impact of both the end of the payroll tax break and the return to pre-Bush tax rates. Conversely, for the top 1%—average income, a cool $2 mil—the high-income tax rate increases and the increases in cap gains and dividend rates are the big ticket items.
The macro economics of all of this can be seen below, where I’ve plotted three forecasts. The bottom two lines are the unemployment rate forecasts by Goldman Sachs and Moody’s.com, both of whom are assuming Congress and the administration will work this out before it’s too late. The CBO, on the other hand, shows what they think will happen to the unemployment rate if we go over and stay over the cliff. Answer: it goes up a lot.
I’ve given a few talks over the pass few days on these issues—this morning’s talk was entitled “Dysfunction Junction,” which tells you all need to know. I’m about to get busy on other stuff and will try to get back to this later. But the point here is that the stakes are high. I’d much rather be sliding down the red and blue lines below than climbing up the green one.
Sources: GS, Moodys, CBO