Ezra Klein on "The Fiscal Cliff" and what it really means for different tax brackets

Although I hope to avoid "The Fiscal Cliff," I have a nagging feeling that "going over the falls" might be the best possible outcome.

Yes, there would be great pain.

But it would be shared pain -- and "progressively" shared pain at that.

Increased tax revenues -- from everyone -- would not only "break the log jam" but make a significant dent in the debt as well.

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Tuesday, October 2, 2012

Welcome to Wonkbook, Ezra Klein and Evan Soltas’s morning policy news primer. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go toWonkblog.

Wonkbook’s Number of the Day: 6.2%, or $3,446.According to the Tax Policy Center, that’s the blow to after-tax income for the average family (well, technically, it’s for the average “tax unit,” but let’s just say “family,” as we’re not robots from the planet budget wonk) if Congress goes over the fiscal cliff. But forget the average, which gets dragged up by the size of the tax increase on the rich. Let’s get more specific.

For families in the bottom 20 percent of the income distribution, the hit to post-tax income is 3.7 percent, or $412, most of which comes from the expiration of the stimulus tax breaks. Families right in the middle lose 4.4 percent of their after-tax income, or about $1,984, mostly from the expiration of the stimulus tax breaks and the payroll tax cut. And for families in the top one percent, going over the fiscal cliff will mean losing 10.5 percent of their after-tax income, or $120,537, mostly due to the expiration of the Bush tax cuts. So everyone takes a hit, but the rich get hit the hardest.

Step back for a moment to consider what this means: After a decade in which median household income fell by more than $10,000 — making it perhaps the worst decade for the middle class in modern American history — Congress, by virtue of being unable to come to a deal, might actually cut the money middle-income Americans have to spend after taxes by another $1,984.

They are, to their credit, trying to come up with a way to keep that from happening. We’ve got much more on those negotiations, and on the fiscal cliff in general, in today’s top story, so keep reading!

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Top story: What happens when the “fiscal cliff” happens?

Congress is planning a post-election dodge of the fiscal cliff. “Senate leaders are closing in on a path for dealing with the ‘fiscal cliff’ facing the country in January, opting to try to use a postelection session of Congress to reach agreement on a comprehensive deficit reduction deal rather than a short-term solution. Senate Democrats and Republicans remain far apart on the details, and House Republicans continue to resist any discussion of tax increases. But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts…[S]enators would come to an agreement on a deficit reduction target — likely to be around $4 trillion over 10 years — to be reached through revenue raised by an overhaul of the tax code, savings from changes to social programs like Medicare and Social Security, and cuts to federal programs. Once the framework is approved, lawmakers would vote on expedited instructions to relevant Congressional committees to draft the details over six months to a year.” Jonathan Weisman inThe New York Times.

And if they fail?

READ: The Tax Policy Center’s breakdown of who pays, and how much, if we go over the cliff.

Going off the fiscal cliff means a tax hike for 90 percent of Americans. “Nearly 90 percent of Americans would face higher taxes next year if Congress lets the nation hurtle over the’"fiscal cliff,’ the year-end precipice of tax hikes and spending cuts that threatens to throw the nation back into recession. A study published Monday by the nonpartisan Tax Policy Center finds that taxes would go up by a collective $536 billion next year, or about $3,500 per household, reducing after-tax income by more than 6 percent — an ‘unprecedented tax increase.’” Lori Montgomery in The Washington Post.

@ryanavent: Joe Biden warning that Republicans will literally push Americans off a cliff.

The tax hikes which come with the fiscal cliff are progressive. “The Tax Policy Center has calculated that the fiscal cliff will raise taxes on 90 percent of Americans, raising the average tax rate 5 percentage points. The tax hike would be largely progressive, with the tax rate increasing more on high-income Americans than lower-income taxpayers. The lowest 20 percent would see their tax rates increase by 3.7 percentage points, while the top 1 percent would see a 7.2 percentage point increase, the study explains.” Suzy Khimm in The Washington Post.

@DKThomp: mmmmm fiscal cliff bars

But the fiscal cliff still means a hard fall for the middle class. “The payroll tax affects 159 million Americans, who've been benefiting from a temporary payroll tax cut that reduced the tax on their wages from 6.2 percent to 4.2 percent. As the New York Times' Annie Lowrey reports today, it's highly likely that this tax cut will expire Jan. 1, regardless of who's elected president. A hike on payroll tax, which funds Social Security, would affect both middle- and upper-income Americans…But the average benefit of the tax cut doesn't increase substantially with income: Households with incomes between $100,000-$200,000 benefit an average of $2,050 from the payroll tax cut, the Tax Policy Center calculates, while those with incomes of more than $1 million receive just a $2,711 average benefit, as most of millionaires' income doesn't usually come from payroll wages.” Suzy Khimm in The Washington Post.

@grossdm: Rosh ha-fiscal year: it will be written who shall live and who shall die after falling off the fiscal cliff

And the poor aren’t spared, either. “For households in the lowest income quintile, earning less than $20,113 a year, the average federal tax rate would climb 3.7 percentage points, with taxes increasing $412 on average. That works out to about $8 a week. ‘For us, it's lunch,’ said Roberton Williams, a study co-author. ‘For other people, it's dinner and lunch and breakfast that day.’ Moreover, many low-income families, particularly those with children, would end up paying much more, because of changes like the halving of the child tax credit.” Annie Lowrey in The New York Times.

@mattyglesias: The “fiscal cliff” metaphor is spawning dozens of annoying spin-off metaphors.

Fed chairman Ben Bernanke to Congress: Be careful with that cliff. “‘I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year…According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations.’”Dylan Matthews in The Washington Post.

@ryanavent: I bet Bernanke’s sensible answers will win over lots of QE skeptics.

What about the agricultural cliff? ”[T]he 112th Congress managed to let the farm bill lapse… This year was the year to renew…But what about the interim period? Is it a disaster that the country now has no farm bill? Not necessarily. Or at least not yet…We're going to party like it's 1949. Technically, the country now reverts to the 1949 farm bill, the last permanent farm bill written into law…For the time being, the nation's farms (and food stamps) will remain intact…Some of the farm bill's conservation programs, however, won't be so lucky…Also, milk prices are now in danger of skyrocketing on Jan. 1…’Under permanent law [i.e., the 1949 bill], government-supported prices would be about four times higher than current law and about twice as high as current market prices.’” Brad Plumer in The Washington Post.

KLEIN: Part of the fiscal cliff comes from Congress choosing to give up on fiscal stimulus. “[B]oth parties agree that the payroll tax cut should be permitted to lapse — meaning that both agree this is a good time for a $920 tax hike on the average family. This might make sense if the economy had entered a period of self-sustaining recovery where private demand was both cutting into the unemployment rate and poised to continue cutting into the unemployment rate. But that's not happening. The labor market is stagnant…[T]he Congress and the White House aren't simply resisting the calls to increase the amount of fiscal stimulus in the economy. They're literally taking stimulus away…[T]he various players seem tired of fighting over the payroll tax cut and antsy to move onto deficit reduction. It's not ‘mission accomplished’ so much as ‘mission too hard, let's try something easier.’”Ezra Klein in The Washington Post.

@ObsoleteDogma: Politicians talk about “going over the fiscal cliff” like it means deficits will increase. Um, the opposite, guys.