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Wednesday, January 02, 2013

Fiscal Cliff 2012, Conclusion

Finally, the Senate, the House, and the President came to an agreement for the fiscal cliff and passed a somewhat reasonable tax bill that will take effect immediately in 2013.  Tax rates will only rise for the highest tax bracket ($400K single/$450K married), rather than the highest two tax brackets (starting at $200K single/$250K married) Obama originally sought.  Read this for the details of the tax bill that passed.


So what is my analysis and grade for President Obama in the fiscal cliff 2012 deal?  I give him a grade of B-

B- is a passing and satisfactory grade, but somewhat disappointing.  It's much better than the grade of "F" back in December 2010.  Here are the strengths and weaknesses of Obama this time around.

Positives:
Obama proved he and the Democrats had the upper hand over the Republicans.  The House Republicans never had anything to offer, just trying to keep tax rates low and loopholes active for the rich.  They tried to bluff, but Obama called the bluff.  Obama left John Boehner totally weakened and ineffictive when the House couldn't create a bill, so the Democratic Senate created the bill that passed.

The wealthiest one percent of Americans making over $400,000 annually are finally paying their fair share and many loopholes are coming to an end.

Negatives:
There are a number of issues with the tax bill that passed.  First, tax revenue is insufficient to reduce the debt.  The failure to raise taxes on incomes starting at $200,000 will still increase the deficit, although by a much smaller amount than in 2012.  Congress can reduce spending, but we are only looking at a zero sum balance at best, that is the deficit will not increase or decrease. 

Second, the $200,000 to $400,000 income range is considered rich that can be taxed, but is not being taxed.  Someone who makes $300,000 income is rich; just ask any middle class American making less than $50,000 income.  More lost revenue and increasing (though at a smaller degree) deficits.

Third, Obama was shortchanged in the inheritance tax.  Obama sought an inheritance tax of 45% with the first $3.5 million exempt; instead 40% with the first $5.0 million exempt was passed.  The dividend tax rate is questionable.  More lost revenue for a staggering deficit.

The biggest mistake Obama made was that he allowed the tax bill to be permanent.  If a few years down the road we are finding the deficit is still increasing and budget shortfalls continue, it will be extremely difficult to raise taxes, particularly on the upper (but not filthy rich) range of $200K to $400K.

A better tax bill would have been to make the tax rates temporarily active for perhaps two years.  If the tax bill were to expire on December 31, 2014, then the President and Congress can review the effectiveness of the tax bill and make any necessary changes.  If they don't agree by the end of 2014, then let tax rates revert back to the Clinton era.  If Obama chose this approach, I would give him at least a grade of at least a B+.

Conclusion:
It looks like the President and Congress were tired from the long days and nights of the fiscal cliff situation, so they were just eager to get something reasonable done.  We'll have more revenue come in and the deficit will grow at a considerably slower pace, but there will still be budget conflicts, shortfalls, and deficits ahead.  Not a major catastrophe as we were heading with the Bush economics, but still some conflicts.

4 Comments:

  • They better not cut my medicare or my social security. I dont care whose taxes they have to raise or how much. I paid in to it all those years and I deserve my retirement and the very best medical care money can buy.

    By Anonymous Anonymous, at 3:12 PM  

  • I dont care how much either President Obama should stick it to those rich mostly white people! i get Snap and my babys gets medicate because i cant find no job Whitey wont give nobody no job so Obama take it out of him in taxes

    By Anonymous Anonymous, at 10:24 AM  

  • "We'll have more revenue come in and the deficit will grow at a considerably slower pace"

    Deficit growth will NOT slow. Too many people dependent on government for their daily bread. Too many tax consumers and not enough tax payers. For every new dollar of revenue, the feds will spend two dollars on new entitlement programs.

    By Anonymous Anonymous, at 11:02 AM  

  • And the Clinton years raised more revenue by taxing the wealthiest Americans, and turned a large deficit into a record surplus.

    By Blogger sailerfraud, at 11:45 PM  

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