…and More Coming Horrors

by Fred Kammer, SJ

While major parts of the presidential campaign focused on the economy, debt, and taxes—individual and corporate—the “fiscal cliff tax deal” reached on January 2nd resolved none of them.  The new revenue raised is far from adequate to end the deficits and reduce the debt, the automatic spending cuts called “sequestration” have only been deferred for sixty days, and the inequalities of the tax code remain largely in place.  In fact, the deal simply sets up three more “fiscal cliffs” in the next quarter.

Before turning to the upcoming crises, we should look first at the “tax deal” or the American Taxpayer Relief Act of 2012 [ATRA].  In doing so, it may be helpful to distinguish between what is “permanently changed” and what is truly “temporary” and what are the quasi-permanent corporate deduction “extenders.”

Permanent

ATRA made the following “permanent” changes in the tax code:

• makes the Bush tax cuts permanent, but raises income, capital gains, and dividend taxes only on couples making over $450,000 or individuals making over $400,000;
• limits itemized deductions and phases out personal exemptions for couples making over $300,000 ($250,000 for singles); and
• makes permanent most of the estate-tax breaks originally enacted in 2010 and indexes them for inflation.

As Bob Greenstein of the Center for Budget and Policy Priorities observes, “All told, the deal makes permanent 82 percent of the Bush tax cuts.” [1]  This continues significant hemorrhaging in the current budget and the continued accumulation of debt attributable largely to Bush policies on war, taxes, and spending.

The inequities in sheer dollar amounts of continuing these tax cuts become clear when one considers, for example, that, in 2013, the bottom 60% of Americans will receive just 18% of these tax cuts—the same share as that received by the richest 1% of Americans. [2]

While the very highest earners saw a restoration of the pre-Bush rates for the upper ranges of their income, the highest 1% of earners still benefit from the reductions in lower rates applied to lower amounts of their income.  The result is that they will pay an average of $17,840 less in taxes than if the Bush tax cuts had expired on January 1, 2013. [3]

Workers paying Social Security taxes will see an increase in the rate of payroll taxes from 4.2% to 6.2% as payroll tax deduction in effect as relief from the recession in 2011 and 2012 is rolled back.  This tax falls hardest on low-and-middle-income Americans relying primarily on salaries and wages.

Temporary

One of the significant weaknesses of ATRA is that the two key tax provisions most helpful to low-income working families—the Child Tax Credit and the Earned Income Tax Credit—were “continued” only for five years. Likewise, the provisions in the American Opportunity Tax Credit for middle- and lower-income college students also was continued only for five years. [Greenstein notes the irony of the disparate treatment of these credits—kept as only temporary—and the permanent status granted to the estate tax cuts which were demanded as a kind of quid pro quo by Republican lawmakers in 2010 for the Child, Earned Income, and American Opportunity credits. [4]  Even tougher, the extension of federal emergency unemployment insurance benefits is only for a year.

Another important “temporary” provision was the delay in sequestration for two months, setting up the next set of budget battles for the nation.

Extenders (that become ongoing and cost more than indicated)

The fiscal cliff deal provides a package of “extenders” which extend through 2013 and retroactively back to 2012 numerous special-interest tax breaks, most of which benefit large corporations.  These include:

• the “bonus depreciation” which allows companies that buy equipment to depreciate them more quickly than actual depreciation [first enacted in 2002, it has been allowed to expire only for the two years 2006 and 2007];
• the research credit [first enacted in 1981, it has been extended fifteen times, often retroactively, and not extended only in one year];
• the “active financing exception” and “CFC look-thru rules” which “essentially make it easier for multinational corporation to shift their domestic profits to off-shore tax havens.” [5]

The extenders together cost over $100 billion in the first two years, but, if they continue to be extended in the coming decade, the cost will be much higher.  In the first two years the cost actually exceeds “the revenue ‘saved’ in the first two years of the decade by allowing the high income Bush tax cuts to expire.” [6]

What is quite ironic about the extenders is that the tax deal makes them retroactive to the year 2012, since the argument for their creation has been that they are incentives to various corporate activities.  Since one cannot incentivize past activities, the extension back in time can only be considered a form of corporate welfare.

In summary, the fiscal cliff tax deal included key relief for low-income and middle-income workers, but some of it only “temporarily.”  It also raised their Social Security taxes.  On the other hand, it made permanent the Bush tax cuts, even for those who can hardly be considered middle-Americans.  In the process, the leverage which the President had available due to the expiration of the Bush tax cuts and the estate tax breaks now has evaporated.  

The horrors coming to a theatre near you

The fights that are coming, especially the debt limit, pose acute threats to the poorest and most vulnerable Americans.  Three crises lie ahead: [7]

• Further reducing the deficit.  Both parties are in agreement that the deficit must be reduced further, thus reducing the long-term debt, but disagree completely on how to do so.  The White House wants a dollar of additional revenue increases for each dollar of further spending cuts.  Republicans reject that notion, insisting that further tax increases are off the table.

• March 1st sequestration.  The fiscal cliff tax deal merely postponed the automatic cuts of sequestration by two months.  Again, Republicans want the elimination of any automatic cuts with other specific spending cuts, and the White House wants a dollar of new revenue for each dollar of cuts.  They may delay sequestration further or replace it with another kind of deal.

• Increasing the debt limit.  A new “Boehner rule” (named for House Speaker John Boehner) insists that any increase in the debt ceiling must include a dollar of spending cuts for each dollar that the debt limit is raised.  As Greenstein observes, “The debt limit fight is key—key to the future of the economy, the budget, and programs for low-income and disadvantaged Americans.” [8]  White House announcements reflect a concern that failure to raise the debt limit, due to expire shortly, would have dire financial consequences for the nation and the global economy.  Republicans see this as an opportunity to make very big spending cuts without revenue increases.

Republicans so far seem unwilling to propose specific significant cuts in Social Security and Medicare, wanting Democrats to make the first move here.  What they have not hesitated to do is to propose trillions of dollars of cuts in core entitlements for low-income Americans, namely Medicaid and SNAP (formerly the Food Stamp program) in addition to other cuts that hit low-income programs disproportionately.  Such extreme cuts were in the 2012 Ryan budget and were passed twice in the House, as recently as December 20th.

In their letter of December 14, 2012, the U.S. Conference of Catholic Bishops reiterated their concern “about the moral and human dimensions of how to reduce unsustainable federal deficits while forming a ‘circle of protection’ around programs that serve our brothers and sisters who are poor and vulnerable in our nation and throughout the world.” [9]  As usual, however, the most poor and disadvantaged are the most vulnerable in this kind of political struggle.  Republicans have made it clear that they will go forward with serious cuts affecting the poorest Americans.  The hundreds of signs prominently displayed by participants at the Democratic Convention—reading “Middle Class First”—raise doubts whether those at the bottom of society in fact will receive the protection that the Gospel’s preferential love of the poor demands.  As Greenstein concludes: “And, for no one will the stakes—and the risks—be higher than for the tens of millions of our least fortunate citizens, those who lack the luxury of well-connected lobbyists and the access that big campaign contributions bring to help protect them on Capitol Hill in the dangerous weeks ahead.”

In his 2013 World Day of Peace message, Pope Benedict describes just the kind of political-economic standoff facing this nation:

"Peacemakers must also bear in mind that, in growing sectors of public opinion, the ideologies of radical liberalism and technocracy are spreading the conviction that economic growth should be pursued even to the detriment of the state’s social responsibilities and civil society’s networks of solidarity, together with social rights and duties. It should be remembered that these rights and duties are fundamental for the full realization of other rights and duties, starting with those which are civil and political."

Once more, the nation stands before hard choices that will determine whether we continue on the path to greater income inequality, fewer protections for the poor and vulnerable, the degradation of social and economic systems of solidarity, and a growing burden of debt on future generations.

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[1] Robert Greenstein, Next Round on the Deficit: Big Dangers Ahead for the Economy, the Budget, and Low-Income People, Center for Budget and Policy Priorities, January 7, 2013, at https://www.cbpp.org/cms/index.cfm?fa=view&id=3883 (accessed on January 10, 2013).

[2] Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal, Citizens for Tax Justice, January 3, 2013, at http://ctj.org/pdf/bidenmcconnelldistribution.pdf (accessed January 10, 2013).

[3] The Biden-McConnell Tax Deal Would Save Less than Half as Much Revenue as President Obama’s Original Tax Proposal, Citizens for Tax Justice, January 1, 2013, at http://ctj.org/pdf/bidenmcconnelldeal.pdf (accessed January 10, 2013).

[4] Robert Greenstein, Disparate Treatment: Permanent, Million-Dollar Estate-Tax Breaks for Wealthy Heirs Vs. Temporary Tax Credit Improvements for Low-Income Working Families, Center for Budget and Policy Priorities, January 4, 2013 at http://www.offthechartsblog.org/disparate-treatment-permanent-million-dollar-estate-tax-breaks-for-wealthy-heirs-vs-temporary-tax-credit-improvements-for-low-income-working-families/ (accessed January 11, 2013).

[5] Revenue Impacts of the Fiscal Cliff Deal, Citizens for Tax Justice, January 3, 2013, at http://ctj.org/pdf/fiscalcliffdealrevenueimpacts.pdf (accessed January 11, 2013).

[6] Ibid.

[7] Greenstein, Next Round…, op. cit., pp. 3-6.  My discussion of these three crises relies heavily on Greenstein’s analysis of the same.

[8] Ibid., p. 4.

[9] Most Reverend Stephen E. Blaire and  Most Reverend Richard E. Pates, on behalf of  the U.S. Bishops, letter of December 14, 2012 to the members of Congress, at http://www.usccb.org/issues-and-action/human-life-and-dignity/federal-budget/upload/federal-budget-letter-congress-2012-12-14.pdf (accessed January 13, 2013).