21 Dec 2012 To Beep or not to Beep
What’s it gonna be fellas?
Or a more reasoned approach?
It’s back to the playbook now that House Speaker John Boehner has scrapped his own Plan B. He said he couldn’t muster enough Republicans in his caucus willing to vote for a tax increase – even though it would impact fewer than 1% of Americans. It is also quite likely that those Republicans didn’t see enough spending cuts coming from the White House to agree to a Plan B.
The idea for the plan was to strengthen Boehner’s hand in negotiations on a larger deal with President Obama that had apparently stalled and to provide a parachute if needed. Now that its failed, no one in Washington now seems to have a plan or an idea of what the outcome will be. Many believe we are headed over the cliff and most will blame the Republicans.
But as more thoughtful observers know, there are a number of additional factors going on that are beyond the control of House and Senate Republicans. America does not simply have an income problem (taxes) so much as a spending problem. The politically charged debate has been craftily steered away from spending cuts (dear to Democrats) by President Obama as he has harped for months on the single issue of raising tax rates on the wealthy. As long as the debate is on taxes, it is the Republicans who get bloodied defending lower taxes while the Democrats avoid infighting, which will surely come, on entitlement cuts.
Boehner said that he intends to continue working with the president to find a deal, but because House members and senators won’t vote on the end-of-year budget issues until after Christmas, they will have less than a week to reach agreement to avert the cliff. Boehner called upon Obama and Senate Majority Leader Harry Reid to come up with legislation to avoid the cliff.
Gerald Seib of the Wall Street Journal points out that Senate Republican leader Mitch McConnell has now become an important player again. Seib reminds us of the debt ceiling talks of 2011 when America came perilously close to defaulting on her debt. The Senate’s two leaders, Harry Reid on the Democratic side and Mr. McConnell on the Republican side created a deal that saved the day. They may be able to find a way forward this time too.
You know the big two implications of the cliff January 1: elimination of the Bush tax cuts for everybody, and across-the-board spending cuts, weighted more toward defense than social programs. But what about the less mentioned? Here are a few.
If Congress does not act this year, the Alternative Minimum Tax or AMT will hit almost 30 million new households this year to include some couples making as little as $45,000 and individuals making as little as $33,750, according to the IRS. Just four million households had to pay the tax in 2011.
The alternative minimum tax was adopted by Congress in 60’s to ensure that the very wealthiest didn’t avoid taxes by accumulating too many deductions and credits. The provision wasn’t indexed for inflation so as incomes rise, more and more taxpayers find themselves learning the hard way about AMT. Until this year, Congress has repeatedly passed an annual exemption to protect middle-class families from the tax.
Additionally, about 75% of households will see their pay reduced starting in January if Washington lets the payroll-tax cut expire, as seems likely. That payroll-tax rate will rise from 4.2% to 6.2%, boosting the amount employers withhold from paychecks. According to the WSJ, a typical taxpayer making $50,000 will pay an average of $1,000 more in taxes for the year. That’s a significant impact on spending, and lifestyle.
Physicians face deep cuts in the reimbursements they receive under Medicare, unless Congress adopts a temporary fix, known as the ‘Doc Fix.’ The problem stems from a 1997 budget deal that imposed spending curbs that proved to be unexpectedly strict, according to the WSJ. Additionally, there are numerous temporary business tax breaks expiring this year that have not been addressed and are not likely to be considered short of major budget legislation.
Economists see as much as a 2% drain on the US economy should we go the way of Wile E. Coyote over the cliff. This veritable anvil on the head may be enough to send the economy into recession once again.
This week the government announced that real GDP growth (adjusted for inflation) for the third quarter was revised up to 3.1% annualized, compared to the second estimate of 2.7%. Second quarter growth was a meager 1.3%. However, that was two-and-a-half months ago and more current data is becoming mixed. The manufacturing sector, which led the economy throughout the recovery is trending down and some say it may already be in recession.
Consumers continue their spending, at least for now. Household purchases rose 0.4% last month after a 0.1% drop in October according to the Commerce Department. Durable goods orders in October gained 0.5% after jumping 9.1% in September.
The economic bright spot is in the housing market. According to Econoday, home builders are reporting the best conditions in more than five years, based on the housing market index which keeps improving with a two point gain in December to 47. This index is up now for eight months in a row and is quickly approaching the breakeven 50 level. A reading over 50 would indicate that more builders describe conditions as good than bad. Existing home sales surged 5.9% in November as well. Declines in the number of distressed properties is credited for the improvement.
Not surprisingly, no one in Washington seems to be able to predict an outcome short of the cliff’s edge. Perhaps the most likely given the political impasse that exists is one presented by Wells Fargo’s chief economist Mark Vitner. He says that his sources in Washington suggest that legislators will allow the December 31st deadline to pass without remedy, then at the earliest possible moment in the new year, pass a measure reducing taxes. That gives everybody cover on the tax issue.