View From the Cliff

April 23rd, 2012 at 5:10 pm

I’ve posted numerous warnings about the big fiscal cliff baked into the legislative cake (whoa…mixed metaphor alert!).  The full sunset of the Bush cuts, the automatic spending cuts, and a bunch of other expirations would amount to a fiscal drag well north of 3% of GDP.

Here, from the able analysts at Moody’s Analytics, is a table of the components of the cliff and their values in 2013.  The first column shows the current law baseline—everything goes crash—and the second column shows Moody’s guesstimates of what Congress might do to soften the blow. 

That cuts the blow by about half, which still ain’t nothin’—and pushes in the wrong direction given an economy that will still be facing highly elevated unemployment.

That said, the conventional wisdom is that the Congress and the administration kick the can down the road by extending everything for another six-12 months.  But I think the President—who will still be president no matter the outcome of the election as this decision must be made in the lame duck session at the end of this year—is much less likely to blink this time and the high-end Bush cuts will sunset, as in the Moody’s forecast. 

And that is at it should be; $80 billion is real money, for sure, but a tax bump on high-income households is less worrisome from a macroeconomic perspective, as they’re not the folks who are liquidity constrained.  And let’s face it—if these high-end cuts are extended yet again, they’re probably permanent.

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4 comments in reply to "View From the Cliff"

  1. Tyler says:

    “[A] tax bump on high-income households is less worrisome from a macroeconomic perspective, as they’re not the folks who are liquidity constrained.”

    I agree, but it’s probably worth mentioning that a household income of $250,000 in NYC or DC doesn’t go very far. How about tying the Bush tax cuts to the unemployment rate? They would not sunset until unemployment falls to two percent – something we haven’t achieved since FDR, but at least FDR proved that it can be done.

    • Bearpaw says:

      $250,000 is 5 times the median household income in NYC.

      Delaying the end of the Bush tax cuts until unemployment falls below 2% would just add another incentive for the PTB to keep unemployment high.

      • Tyler says:

        Plenty of people are living in poverty in NYC, but that doesn’t mean a household income of $250k is more than enough for a family living there. New York City is an extraordinarily expensive place to live. I just don’t see the point in raising income taxes on the 99 percent (or anyone, really) during a depression.

        Your second point strikes me as a good reason to just make the Bush tax cuts permanent. Then we’ll never have to talk or hear about them again, except in econ classes when professors need an example to show why tax cuts should not be primarily targeted at the rich.

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