More Cliff Notes

October 2nd, 2012 at 1:27 am

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’, 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

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3 comments in reply to "More Cliff Notes"

  1. Jan Rooth says:

    What this ignores is that there is no prospect whatsoever that congress would “stay over the cliff.”

    The benefit of going “off the cliff” is that we then have a new baseline, and Republicans will be put in the position of actually taking money out of the people’s pockets every day they obstruct the middle and lower class parts of these policies unless it includes the massive benefits for the 1%.

    It’s very simple (assuming the Democrats hold the Senate):

    1) Go off the cliff, promising all the while to return all the good stuff as the first legislative agenda item and to make it all retroactive to Jan. 1 2013.

    2) Eliminate the filibuster on day one of the Senate session when adopting the rules. This prevents Republican obstructionism in the Senate.

    3) Take the first House bill that comes over and replace its contents wholesale with an amendment containing all the good stuff we want to keep, retroactive to Jan 1. Pass that and dare the Republicans in the House to block it. Watch the people beat their Republican representatives to a bloddy pulp if they actually do.

  2. Christopher C. says:

    Let’s just go over the whole cliff to finally reset *all* the Bush tax cuts!

    Then, let’s turn around and use some of the generated revenue for job creating/preserving stimulus in the form for aid to states, infrastructure spending and aid to distressed mortgages.

    Wouldn’t that go quite a ways towards ameliorating the projected recession?

    And if the republicans block it, they continue to dig their own graves…