Sunday, October 22nd, 2017

The Cliff Deal and the Economy

Posted: Thursday, January 3, 2013

By Raymond J. Keating

A majority of elected officials in Washington, D.C. once again have proven how disconnected they are from economic reality by passing their so-called remedy to the “fiscal cliff.”

The politicians argue that their deal averted the catastrophe of massive tax increases, and arbitrary spending cuts in federal programs.

The reality, of course, is that compared to 2012, the deal approved by Congress and signed by the President amounts to a huge tax increase, while government spending just keeps chugging along at unsustainable levels.

The “fiscal cliff” was not some looming natural disaster. Instead, it was a political contrivance. That is, politicians had the choice of doing something that would help the economy, or doing something that would hurt the economy. Unfortunately, the latter choice was made.

What matters is how actual policy has changed from the previous year. Compared to 2012, in 2013:

• The top personal income tax rate for individuals earning more than $400,000 ($450,00 for married filers) goes from 35 percent to 39.6 percent. But once the ObamaCare Medicare income tax increase is included, the total top tax rate moves from 37.9 percent to 43.4 percent. For good measure, due to the “cliff” deal re-imposing phase-outs of standard exemptions and itemized deductions, the effective tax rate climbs still higher.

• The capital gains and dividends tax rate goes from 15 percent to 20 percent. But, again, the ObamaCare tax increase must be added in, moving the top rate to 23.8 percent.

• The death tax rate climbs from 35 percent to 40 percent.

• The two-year, temporary reduction in the worker’s share of the Social Security payroll tax ends, with the tax rate climbing from 4.2 percent back to 6.2 percent.

While a few positives made their way into the cliff deal – such as making the alternative minimum tax patch permanent, extending the research and experimentation tax credit for two years, allowing for 50 percent bonus depreciation for a year, and extending higher Section 179 expensing levels for a year (up to $500,000 in capital spending) – these do not come close to the huge negatives in this “cliff” deal for entrepreneurship, investment and the economy. Other than the AMT patch, the effectiveness of the other potential plusses are limited given their temporary nature – continuing a problem that we have been dealing with on tax matters for over a decade now.

In the end, the deal that avoided the “fiscal cliff” amounts to a package that inflicts serious costs and damage on an already long-suffering economy. Of course, U.S. entrepreneurs, businesses, investors, workers and consumers deserve something far better.

I know it might sound crazy in Washington these days, but why not a policy package of substantive, permanent tax and regulatory relief, and federal spending reductions, that actually helps the economy? Hey, just asking.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.