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Mon Dec 3, 2012, 06:10 PM

dumb question about the fiscal cliff

I've periodically started discussions here at DU of topics that I cannot find answers to anywhere. I've got another one.
If the fiscal cliff will have tax cuts and reduction of public services, shouldn't everyone be happy? Wouldn't the increased amount of money being available to support various government services make Democrats happy? Wouldn't the fewer government entitlements make Republicans happy?

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Reply dumb question about the fiscal cliff (Original post)
skippercollector Dec 2012 OP
NMDemDist2 Dec 2012 #1
Rider3 Dec 2012 #2
mbperrin Dec 2012 #4
LineReply .
Prometheus_unbound Dec 2012 #3
Blackhawk44 Dec 2012 #5
Prometheus_unbound Dec 2012 #6
mbperrin Dec 2012 #11
Yo_Mama Dec 2012 #7
hay rick Dec 2012 #8
skippercollector Dec 2012 #9
golfguru Dec 2012 #10
skippercollector Jan 2013 #12
progree Jan 2013 #13

Response to skippercollector (Original post)

Mon Dec 3, 2012, 06:20 PM

1. first they are two different events and

it's not 'reduction of public services' it's an across the board 10% cut

google 'sequestration'


The real-world impact of a short sequester of several weeks would vary program by program. For example, Education Department grants to school districts are sent out in early fall and wouldn't be affected unless the sequester dragged on for months. The same for a program like Head Start, in which funding is delivered to states in the summer.

But labor-intensive programs like air traffic control, meat inspection and Transportation Security Administration screening at airports would be affected immediately. Fewer employees at national parks could mean closed campgrounds and less access for visitors, and there would be fewer workplace safety inspectors.

Cuts in other federal programs might go unnoticed for a while. For example, many people eligible for subsidized housing vouchers are already on waiting lists. Their wait would just be longer.

The impact would be more pronounced if gridlock persisted and the sequester lasted a year.

In testimony to Congress earlier this month, acting White House Budget Director Jeffrey Zients said the automatic spending cuts would mean that 700,000 fewer low-income women and children would receive food aid and 100,000 preschool kids would lose places in Head Start.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 06:23 PM

2. Hmmm...

This is a good and difficult question. As far as I understand it, if we "go over the cliff," all tax breaks end for everyone and must be renegotiated. Therefore, the big tax breaks given right now to the top 1% will no longer be in effect, and everyone will have to go back to the drawing board. What irritates me is that all this talk about the "financial cliff" was never so pronounced as it has been with Obama's administration. With Reagan, they raised the ceiling more than a few times. Yet, here we are, and the GOP won't counter Obama's plan with one of their own. All they say is that they want to protect the top 1%. I say, let's go over the cliff at this point. Things may have to get worse before they will get better. I'd really like to hear others' opinions, especially those correcting my thoughts!

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Response to Rider3 (Reply #2)

Mon Dec 3, 2012, 11:45 PM

4. I'm ready to go over.

The removal of the tax cuts would just take us back to Bill Clinton's second term, when I did very well financially.

The spending cuts for humans could easily be restored as crowds of pitchfork-waving people show up at their local Congress-zombie's office.

Could all be sorted out before spring break, I believe, and finally show the Pubs for what they truly are - ideologues who hate people.

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Response to skippercollector (Original post)

Mon Dec 3, 2012, 07:01 PM

3. .

One correction: the fiscal cliff will not have tax cuts, but tax hikes on the rich.
This would be very nice, except that by increasing revenues and reducing spending so quickly, we are reducing overall demand.
People would have less money to spend, and government would spend less.
The result of this demand crash, in our depressed economy, would be to kill or at least maim the recovery.
The hope is to negotiate a slightly slower deficit reduction.

(my personal opinion is that hitting the cliff wouldn't be too bad, but you're free to dissent)

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Response to Prometheus_unbound (Reply #3)

Tue Dec 4, 2012, 02:44 AM

5. wrong. the Bush era tax cuts for everyone ...


are 'sunsetting' after
10 (or is it 11?) years.
also some payroll temporary tax
reductions are ending

there is also 'sequestration'.

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Response to Blackhawk44 (Reply #5)

Tue Dec 4, 2012, 04:30 AM

6. Fine

I just wanted to point out that the end of a tax cut is equivalent to a tax hike, while it seemed like the poster wrote the opposite.
Yes, the Bush cuts did not only benefit the rich. However, they did benefit the rich much more, both in absolute and proportional terms, than they benefited everyone else. In other words, they did worsen income inequality and starve public revenue at the same time.
As for random across the board cuts (sequestration), I thought I had made clear that I don't like them and think they are a dumb idea, especially now.

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Response to Prometheus_unbound (Reply #3)

Mon Dec 31, 2012, 06:58 PM

11. Reduced demand from immediate cash could be made up

by people using their own credit, which they have been paying off like crazy for a while due to the uncertainty of what would happen next. Uncertainty solved by going over the cliff, personal debt could be the bridge to at least evening of demand.

And you're right, the "cliff" is really just a return to the Clinton era, where we created 23 million jobs and actually balanced the budget two years in a row.

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Response to skippercollector (Original post)

Wed Dec 5, 2012, 09:17 AM

7. Taking a stab at it

What's referred to as the "fiscal cliff" is what is about to happen under current law. This is the total effect of a number of laws, which include the following:

1) The expiration of the payroll tax cut, which will raise taxes 2% for every worker. (This is going to go into effect, it seems from the current negotiations).

2) The expiration of the Bush tax cuts, which would also raise taxes on all Americans. The details of the tax brackets can be found here:

On the lowest income Americans, the tax rate would increase by 5%. Thus, combined with the expiration of the payroll tax cut, some lower income individuals would wind up paying 7% higher in federal taxes. The actual effect would be more, because standard deductions were increased, tax credits for children were increased, and the credit for child care was increased. So some unlucky lower income households could see net increases of federal taxes of something like 20%.

It is true that the tax rate for high income households would increase by about 4.6%, but in fact the combination of the two changes would mean that lower income households paid more of a relative increase than higher income households. This is why President Obama has never been in favor of letting the Bush tax cuts expire for most households. There was a huge low income tax cut in the various changes in the 2001 & 2003 tax bills, and I don't know anyone who thinks that lower income households can afford such a large tax increase right now, given the trends in their real incomes.

Also AMT (alternate minimum tax) would increase taxes very significantly for a range of middle income households.

3) Sequestration: The budget negotiations (debt limit increase) of last year included provisions to cut spending automatically if Congress didn't do it on their own specifically. This change automatically cuts the federal budget very significantly. For details, see this:
In 2013 the automatic cuts are estimated to be about 109 billion, split equally between defense and non defense. There is a statutory 2% cut in Medicare reimbursements to health care providers. Otherwise the cuts are equally divided across various non-mandatory spending programs.

4) Cuts to extended unemployment benefits.

The "fiscal cliff" as it now stands amounts to about 550-600 billion spread across the year. The major components are about 110 billion in increased payroll taxes, about 109 billion in decreased federal spending, and somewhere around 400 billion in other tax increases, which are very unevenly distributed across the tax-paying population.

That would add up to something like 50 billion less a month in nominal GDP. Absolutely no one believes that the US economy can withstand that without entering an acute recession, thus the worry of the fiscal cliff. To understand why, see the latest GDP release:

Over the last four quarters, nominal (current dollar) GDP has risen about 470 billion dollars. This is less than the amount of the money that would be taken out of the economy by the fiscal cliff, so it is pretty obvious that the US economy would contract if we let the fiscal cliff take effect.

Now there are an increasing number of analysts who believe that the US has already entered recession, which is why the Fed is putting an extra 40 billion a month into the economy (or trying to) via extra bond purchases. But that stimulus doesn't circulate well, so even doubling it is unlikely to avoid severe recession if we go into 2013 without making changes.

CBO estimated that GDP in 2013 would be reduced by 4% under current law:

That is on the order of a 2% contraction in GDP. The CBO analysis is old (it dates back to May), and the US economy has notably weakened since, so their projections of the net effect are too optimistic. Negative economy feedback effects would be stronger, and increased spending on unemployment benefits and food stamps and so forth would cost more.

This link shows how unequal the impact would be for some of the groups who would be affected if we let current law continue:

It starts out with the shocker of a 55% tax increase for an unemployed person with very low income, but that is correct. The college student example is also definitely in the ball park. Most of the $1,400 tax increase for a low-income married couple with children comes from the much lower child tax credit, but obviously a couple with an income of 30K can't afford to pay even $700 in extra taxes.

Effects on that scale on individual households have a much bigger economic effect than one would expect by spreading it across the population; consumer expenditures would be sharply cut for a range of households, and loan defaults would rise, which would further tighten credit standards and have negative economic feedback effects.

There's at least a 50% chance that we are currently in a recession. Even if all the the above were reversed (current law extended), there is at least a 75% chance that we would fall into recession in 2013, although probably a mild one.

Thus there is at least a chance that we will not see an agreement on the fiscal cliff because everyone wants to blame the current situation on someone else.

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Response to Yo_Mama (Reply #7)

Wed Dec 5, 2012, 12:37 PM

8. Sausage.

"Current policy" extrapolations deal with an unlikely scenario. If past experience is any guide, the AMT patch and Medicare "doc fix" will receive bipartisan support and be removed from the equation. I suppose the Republicans could double down on hostage-taking, but I would have to see it to believe it.

Thanks for a useful post.

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Response to skippercollector (Original post)

Sun Dec 30, 2012, 06:10 PM

9. thanks

I want to thank everyone for replying. It helped a lot!
I've noticed this month that while there's been a great deal of discussion about the end of the tax cuts, there's been little or nothing about the reduction of public services, at least, nothing that I've found.

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Response to skippercollector (Original post)

Mon Dec 31, 2012, 02:16 AM

10. Going over the fiscal cliff (FC) would be good in the long run


First, it would get rid of Bush tax cuts for the rich. The rich will pay far more in taxes than middle class increases.

Second, it would significantly reduce military spending. Why are we spending 10 times more on military than any country in the world? Why are we borrowing money from the Asians to protect oil flowing to Asia from the middle-east?

Third, the cuts in spending are non-discriminatory. Every department of the government gets equally cut. No favoritism!

Lastly, our debt and future liabilities are out of sight. Here is a great article by M. Zuckerman
who is no right wing ideologue.


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Response to skippercollector (Original post)

Fri Jan 11, 2013, 08:37 AM

12. I'm back!

I've now been reading that the demise of the tax cuts (or the increase in taxes) will be going toward Social Security. Do you have any specifics on how the additional taxes will be used toward Social Security?

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Response to skippercollector (Reply #12)

Sat Jan 12, 2013, 06:47 PM

13. Social Security payroll tax holiday did not affect the Social Security Trust Fund at all

Here's something from another thread that I cobbled together.

[font color=blue] questioner> Income taxes can be spent by the government, while the payroll taxes go to SS and Medicare. That money {{ the increase Social Security payroll tax money as a result of the ending of the partial payroll tax holiday }} is going to rebuild those accounts, instead of increasing the amounts paid out. Reduced personal spending and reduced government spending create fiscal drag. < [/font]

I added the bold font to "That money is going to rebuild the accounts".

Actually, the partial payroll tax holiday (a 2 percentage point of income reduction in the employee's tax) did not reduce the inflow into the Social Security Trust Fund (SSTF). The Treasury's General Fund made up the difference (by borrowing more from the public):

/==========2011 SSTF Operations ==================================
http://www.ssa.gov/oact/trsum/index.html - Below is about calendar year 2011 published April 2012

(Progree note: the SSTF = OAS trust fund + DI trust fund, often combined and called the "OASDI" or "OADI" trust fund. All emphasis in the below is mine)


... "A temporary reduction in the Social Security payroll tax rate reduced payroll tax revenues by $103 billion in 2011 and by a projected $112 billion in 2012. The legislation establishing the payroll tax reduction also provided for transfers of revenues from the general fund to the trust funds in order to "replicate to the extent possible" payments that would have occurred if the payroll tax reduction had not been enacted. Those general fund reimbursements comprise about 15 percent of the program's non-interest income in 2011 and 2012".

[font face = courier new]... "What Were the Trust Fund Results in 2011?" (In $ Billions)

(they had OASI and DI trust funds separately, I added them together in the below. All underscores are for spacing, because DU software removes leading spaces -Progree)

2608.9 Assets (end of 2010)
_805.1 Income during 2011
_736.1 Outgo during 2011
__68.9 Net Increase in Assets
2678.0 Assets (end of 2011)

... "What Were the Sources of Income to the Trust Funds in 2011?" (In $ Billions)

(they had OASI and DI trust funds separately, I added them together in the below -Progree)

564.3 Payroll taxes
_23.8 Taxes on benefits
102.7 [font face = Arial]General Fund reimbursements[/font]
114.4 Interest Earnings
805.1 Total [/font]

... "The Temporary Payroll Tax Cut Continuation Act of 2011 (Public Law 112-78) and the Middle Class Tax Relief and Job Creation Act of 2012 (Public Law 112-96) reduced the OASDI tax rate for 2012 by 2 percentage points for employees and for self-employed workers. Under current law, the employee tax rate reverts to the employer rate in 2013. Transfers from the General Fund of the Treasury to the OASI and DI Trust Funds compensate for the loss of payroll tax revenue due to the temporary reduction and have no financial impact on either trust fund."

... "But the weak economy has placed indirect pressure on the program as well, in that lawmakers have relieved workers of part of the tax burden of financing Social Security benefits so as to bolster near-term economic growth. Under this policy, over $200 billion will be transferred from the General Fund of the Treasury to replace foregone Social Security tax collections. In 2011, due in large part to this change in program financing, payroll tax revenue represented only 70 percent of total Social Security income. Lawmakers should carefully consider whether continued significant General Fund financing for Social Security could threaten to undermine long-standing public perceptions of the program as an earned benefit financed by workers according to contributory social insurance principles."


See also the first 2 tables of http://www.ssa.gov/oact/STATS/table4a3.html and note the General Fund reimbursements column of the 2nd table.

In short, the SSTF was not at all impacted by the payroll tax holiday. It has as many assets in it with the payroll tax holiday as it would have had without it. However, the last sentence of the the above excerpt is crucial:

"Lawmakers should carefully consider whether continued significant General Fund financing for Social Security could threaten to undermine long-standing public perceptions of the program as an earned benefit financed by workers according to contributory social insurance principles."

In other words, we progressives have long claimed that SS was a separate program separately funded by payroll taxes and not contributing one cent to our national deficits. That is no longer true -- thanks to the payroll tax holiday in 2011 and 2012, over $200 billion of the funding of these programs have come from the general fund, and to get that money, $200+ billion was borrowed from the public (Treasury securities were sold to U.S. and international investors and savers), i.e. put on the national credit card. Thus it is no longer a program that has been financed entirely by payroll taxes.

Obama tax proposal worries Social Security allies, Associated Press, 9/12/11

... "Last year (i.e. in 2010 -Progree), Social Security's expenditures were $49 billion more than it collected in taxes, the first time it ran a deficit since 1983".

(Progree notes that there was no payroll tax holiday in 2010 -- the year being discussed in this article -- so this isn't a complicating factor. Note also that $117.5 B of interest was earned on trust fund assets in 2010. This interest earned exceeded the $49 billion operating deficit by $68.6 B, so the SSTF assets increased by $68.6 B. See the table at the very bottom of this posting for the 2010 SSTF operations).

... "Obama and Congress agreed in December to cut the 6.2 percent payroll tax that workers pay on their wages to 4.2 percent in 2011 as part of a deal continuing former President George W. Bush's 2001 and 2003 tax cuts. That cost Social Security $112 billion — money the government is making up by putting an equal amount of additional IOUs in the system's trust fund."


[font color=blue] questioner> Income taxes can be spent by the government, while the payroll taxes go to SS and Medicare [/font]

Well, sort of. The government primarily spends the payroll taxes on SS and Medicare beneficiaries. I'll just talk about the SS part of it, since the payroll tax holiday affected SS, not Medicare. Any annual SS surpluses -- amounts received in SS payroll taxes in excess of SS program beneficiary program payouts -- are borrowed by the federal government and spent on general federal spending (aircraft carriers, national parks, government salaries, on and on). In return, for those surplus amounts that were borrowed and spent, they put special federal securities into the trust funds, that say in effect, "I the federal government, owe you (whatever trust fund, whatever dollars)". The SSTF (and Medicare trust funds) consist entirely of such federal securities.

But you are correct that there will be a fiscal drag that will be caused by the ending of the partial payroll tax holiday.

During the payroll tax holiday, workers kept more money in their pocket and spent most of it, thus stimulating the economy. The federal government collected less money in payroll taxes, and so, instead of being able to borrow and spend those payroll tax dollars, they had to make up the difference elsewhere by borrowing more from U.S. and international savers and investors (selling bonds to the public, where the "public" includes international as well as U.S.).

That last paragraph is a bit simplified, since actually there was an operating deficit in Social Security (even had there been no payroll tax holiday, expenditures on SS would have exceeded SS tax revenues collected by about $45.5 B. So absent the payroll tax holiday, the federal government would have needed to borrow $45.5 B from the public in order to meet its SS obligations. With the payroll tax holiday, they had to borrow: $45.5 B + $102.7 B = $148.2 B. The $102.7 B is the "General Fund reimbursements" shown in the table way above)

I can explain this further, like what about the interest earned by the SSTF? Those are just more inter-agency securities created by the federal government and put into the SSTF.

What is in the SSTF? How is the interest rate determined?

# "Federal law requires that all excess funds be invested in interest-bearing securities backed by the full faith and credit of the United States. The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government which earn a market rate of interest. The balances in the trust funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to pay benefits." - Source: http://www.ssa.gov/oact/trsum/index.html

# "All securities held by the trust funds have been issued by the Federal Government". Currently all the securities are "special issues—securities available only to the trust fund" - Source: http://www.ssa.gov/oact/ProgData/investheld.html

# All of this in gory detail: http://www.ssa.gov/OACT/NOTES/note142.html

The harsh truth is that while the SSTF is an asset to SS, it is a liability to the federal government (it is money that the federal government owes one of its own agencies - SS). It is counted as part of the national debt. In the below, the "IntraGov" is the various trust funds, primarily the SS and Medicare trust funds.

[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"] National Debt in Billions of Dollars

[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]
[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"] Public IntraGov Total
[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]1/20/2009 6,307 4,320 10,627 Obama inaugurated
[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]1/3/2013 11,578 4,853 16,431 Present
[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]
[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]% Increase 84% 12% 55%

[div style="display:inline; font-size:1.37em; font-family:monospace; white-space:pre;"]Public: debt held by the public. Intragov: Intragovernmental debt
# URL: http://www.treasurydirect.gov/NP/BPDLogin?application=np

[font color=blue] questioner> Reduced personal spending and reduced government spending create fiscal drag. < [/font]

The payroll tax holiday has nothing to do with government spending one way or another. Well, if anything -- since the ending of the holiday increases payroll taxes collected from workers -- the federal government will have to borrow less from the public (U.S. and international investors and savers). So if anything it might encourage more spending than otherwise in that our deficit and national debt situation looks a little better without the payroll tax holiday than with it.

As for how much the ending of the payroll tax holiday will cause in fiscal drag, who knows. All during the 2012 presidential campaign, and, for the last 2 or 3 prior years, right wing economists were bloviating about how the stimulus did no good. (The payroll tax holiday, and its similar 2009 & 2010 predecessor -- The Making Work Pay Tax Credit -- were major parts of the stimulus). So I find it ironic that these same economists are suddenly screaming Chicken Little now that this stimulus measure has ended.

Personally, I agree with you that it will significantly matter, and I was shocked and disappointed that the administration didn't even try to bargain for continuing it for another year or two. (It's what happens just about every time a basically nice well-meaning person negotiates with greedy mean-spirited sociopaths). Although it would be much better (and would have been much better in 2011-2012) to simply give workers a 2% of earned income tax credit that didn't involve the Social Security system in any way. I have never read anything about why the Administration had decided to involve the Social Security system in all this in the first place.

/==========2010 SSTF Operations =================================
(A year where there was no payroll tax holiday. I just put it here because the 9/12/11
Associated Press article discusses 2010. And to show the picture in the most recent year without a payroll tax holiday. Everything in ()'s in the below is mine -Progree)


[font face = courier new].... What Were the Trust Fund Results in 2010? (In $ Billions)
It shows: (they had OASI and DI trust funds separately, I added them together in the below)

2540.3 Assets (end of 2009)
_781.1 Income during 2010 (includes interest income)
_712.6 Outgo during 2010
__68.6 Net increase in assets (were it not for the interest income, trust fund assets would have decreased by $48.9 B).
2608.9 Assets (end of 2010)

... What Were the Sources of Income to the Trust Funds in 2010? (In $ Billions)
It shows: (they had OASI and DI trust funds separately, I added them together in the below)

637.3 Payroll taxes
__2.4 General fund reimbursements
117.5 Interest earnings
_24.0 Taxes on benefits
781.1 Total [/font]


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