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Fiscal Mayhem Awaits at Year-End

Everything comes undone simultaneously

How did the Mayans get it so right when they predicted that life-altering or cataclysmic events in the year 2012 are destined either to end it all or at least bring turmoil? Because as this year draws to a close in the United States, pick your metaphor —
The Mayan Long Calendar,
with its end time date of
December 21, 2012

perfect storm , Armageddon, end times — we are going to see a fiscal maelstrom.

On New Year’s Eve the sun sets on the Bush tax cuts (now Obama’s). Everyone’s tax rates go up automatically and noticeably to what they were in 2000, even the 15% rate on capital gains and dividends, which revert to treatment as ordinary income.

Remember the Supercommittee? That gathering of a dozen Republicans and Democrats charged last August with apportioning $1.2 trillion in bipartisan It begins:   House Speaker John Boehner has aready thrown down the gauntlet. In mid-May he decreed that any increase in the nation's debt limit late this year must be paid for by still larger spending cuts and no tax increases. Even if the Tea Party doesn't do as well in the fall elections?spending cuts? Their failure after 76 days of going in circles triggered the default agreement that the $1.2 trillion in cuts be equally split between defense and entitlements. That happens too, beginning year-end.

We can expect a fevered attempt to re-trade how the $1.2 trillion is split. Paul Ryan has already ignited furor by reneging on the deal; he intends to restore to the defense budget the $55 billion that was to have been its share of cuts.

What brought about the deal for those spending cuts was Congress’ agreement to raise the debt limit to $16.4 trillion — supposedly Update: Bernanke Sounds Alarm  If the "Bush" and payroll tax cuts are allowed to expire by Congress and the President at year-end, and the automatic defense and entitlement spending cuts go forward, Fed Chairman Ben Bernanke said in a news conference April 25th that "there is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset [their] effect on the economy." enough to get us to the end of 2012 so that we wouldn’t have a debt limit crisis every few months like that of last summer. So what else do we have at the end of 2012? The reprise of the debt limit crisis.

Actually, Treasury Secretary Tim Geithner told the Senate Budget Committee in February that the debt is likely to reach its statutory limit before year-end — possibly even before the election.

And then there’s the payroll tax. It doubles to the normal 6.2% January 1. Elections over, not even Obama will probably lobby for the discount to continue, but wage earners will probably raise a ruckus if 3% more is slated to come out of their paychecks if no tax increase is in the offing for the wealthy.

And, if in June the Supreme Court decides to rule against the insurance mandate, or overturns the Affordable Car Act altogether, more chaos will descend upon the second half of the year, as the legislature is presented either with a complex repair job, or the states and federal government must take steps to roll back what they have instituted so far.

All of which portends a fiscal farrago the likes of which we have never seen as year-end approaches. No matter who wins the election, Barack Obama will still be president when the year’s clock tolls midnight. And whereas an ABC poll says the Tea Party “has stalled in public popularity…its support well below a majority”, and its card carriers may find themselves voted out of office in the coming election, they are nevertheless still in their seats until the end of the year, avidly wishing to take another swipe at reducing the federal government by starving it of funds.

We will see no end of name-calling and acrimonious outbursts as our polarized politicians take this country to the brink.

bifurcated Budgets

What better harbinger of what is to come than the polar opposite budgets unveiled first by President Obama and then by Wisconsin Congressman Paul Ryan, who has won the mantle of fiscal intellectual for the Republican Party.

Obama called Ryan’s opus a “Trojan horse” that would herd Medicare recipients into the corrals of private insurers and called “social Darwinism” Ryan’s plan to shred social programs in the name of bolstering what Ryan called their “will and incentive to make the most of their lives”.

The President wants to forge ahead with spending on favorite programs — a near-term $350 billion to job creation, a six-year infrastructure program of $476 billion, $60 billion to renovate 35,000 schools, research on advanced manufacturing techniques, union-pleasing monies to states to help them retain teachers, fire fighters, police, and so on. He would pay for a bit of this by raising only the top tax bracket by 3.9% while permanently retaining all other Bush tax cuts, and by instituting the “Buffett Rule” requiring all who earn a million dollars and above would pay at least 30% in federal taxes. (The “Buffett Rule”, however, was rebuffed by the Senate. Mostly symbolic — we called it "a populist gimmick" in this post — it would have raised only $47 billion over 10 years.)

His is a budget that does nothing to confront the oncoming tsunami of Medicare costs brought about by the retiring baby boomers and relentlessly rising health costs, a burden that is expected to rise from 2012’s $478 billion to $1.36 trillion in 2022. It is a budget that would add $6.7 trillion to the national debt, which will already be close to $16.4 trillion when fiscal 2013 starts October 1. It is a plan for national insolvency.

Ryan’s budget goes to the other extreme. He cuts $5.3 trillion in spending across 10 years compared to Obama’s budget, yet Ryan, too, adds to the national debt by some $4 trillion, to the consternation of many in his party who had hoped that he would finally arrive at balance.

His Medicare transformation — which like his budget of last year would give “premium support” vouchers to seniors with which to buy insurance in the private market — offers them the option of staying with traditional Medicare this time around. He projects Medicare costs $205 billion less over 10 years. Add to that $770 chopped from Medicaid. And he assumes that, whether repealed after a Republican takeover or struck down by the Supreme Court, $1.6 trillion will not be spent on Obama’s health care law.

So with all these brutal cuts to programs that benefit the poor, leaving them to “pull themselves up by the bootstraps” as he puts it, how does he nevertheless manage to run a perpetual deficit?

By cutting revenue, already at the historic lows that partly explain the current annual deficit. The top rate of both personal and corporate taxes would be reduced from 35% to 25%. Corporations would pay no tax on profits earned abroad. The Alternative Minimum Tax would be cancelled. Inheritance tax would be zero. But the 15% rate on capital gains and dividends would be left untouched. All in all, a bonanza for the wealthy.

The wealthy like Mitt Romney. No surprise that he called Ryan’s plan “marvelous”, “a word you don’t often hear, generally”, said the President, chortling over the gift to his campaign of Romney embracing a budget that savages social programs while benefiting the top income earners still more.

Ryan says that various deductions, exemptions, exclusions and credits — “loopholes”, as they have collectively come to be called — would be eliminated to cover the drop in revenue. Which ones? Would employee-paid health care be counted as income and made subject to tax? Would home mortgage interest no longer be deductible? State and local taxes? These biggest items are a must if the revenue cuts are to be recouped. But Ryan ducks the question of which ones. He says such specifics are outside the province of his committee.

But the Senate hasn’t passed a budget in three years, nor will it for 2013. Federal budgets are more like ideological statements; they don’t dwell on specifics and leave the details to appropriation bills that will be voted on as fiscal 2013 debuts this fall. As to ideology, “no two documents illustrate this choice of two futures better than the president's budget and the one put forward by House Republicans”, as Ryan himself said in a Wall Street Journal op-ed, referring to his budget, which was passed by the Republican-controlled House, signaling us what is to come if the Republicans gain control of the White House and the Senate.

All of which is to say that with synchronous end times for a cluster of laws and agreements, with not the slightest hint of possible compromise in evidence, and a Congress that will block any revenue increases while holding to a debt limit inadequate for either of those dramatically opposed budgets, we will see open warfare with both sides carpet-bombing the 24-hour news cycle daily.

Stock up on food and put your money under the mattress (remember that the Dow fell 635 points in one day last August when Standard & Poor’s downgraded the United States’ AAA rating). If the bombardment from both camps in the final months of this year doesn’t lift, the country likely will slow to a halt.

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