Consequences of budget gridlock
Bush tax-cut expiration will hurt Americans’ pocketbooks
Let’s take a break from guessing who the Republican presidential nominee will be (it’ll be Mitt Romney) and consider something that is knowable and measurably consequential. At the end of 2012, George W. Bush-era tax rates and a payroll-tax holiday are scheduled to expire. This means that every American with a paycheck will face a tax increase, potentially a very sizable one. In tax terms, that’s catastrophic: Taxageddon. Trillions of dollars of federal revenue are at stake, in fact, the largest tax increase in history. If Congress does nothing and allows the rates to rise, budget deficits will shrink by roughly $5 trillion over the next decade — and taxpayers’ wallets will get lighter by the same amount.
But if Congress acts to extend the laws, stopping the rate increases, taxpayers will feel no new pain. The federal government, however, will be forced to shoulder annual deficits hundreds of billions of dollars larger than the trillion-dollar-a-year shortfalls it’s already expected to suffer.
Take the payroll-tax holiday. If it disappears, 160 million workers will lose $80 a month on average. If the Bush tax rates end, the two top income tax rates will increase from 33 percent and 35 percent to 36 percent and 39.6 percent. The rate on capital gains, the profit from the sale of property or securities, will rise to 20 percent from 15 percent and the rate on dividends will more than double from 15 percent to 36 percent or 39.6 percent, depending on a taxpayer’s bracket.
That’s not all. Federal spending also is about to be curtailed sharply.
The compromise reached to increase the U.S. borrowing limit last August mandated $1.2 trillion in spending cuts over 10 years — half from the Pentagon — that will go into effect automatically next year.
Coupled with Taxageddon, this slash in outlays will usher in the biggest change in the size and shape of the federal government since World War II.
The question is: How much of this will be allowed to happen? That’s what this year’s elections are about. Republicans claim to hate debt and deficits. But they are campaigning against tax increases that would ease the problem they say they care about so much. Many also say they’re determined to block the slowdown in military spending that would have the same impact.
Democrats, ironically, have a greater claim to a deficit solution than the GOP because they favor tax increases (by ending the Bush rates) that would stanch red ink by the barrelfull. They also like the Pentagon reductions. But they aren’t eager to save much more and, in fact, would like many programs to balloon. So who gets to pay? If President Obama is re-elected, he no doubt will stop any effort either to keep the Bush rates or to forestall the military reductions. Indeed, that’s the most likely outcome almost no matter who’s the next president.
In Washington, it’s always easier to stop something from happening than to make it happen. Congress would have to take special action — and the president would have to concur — to avert the spending cuts and extend the Bush rates and the payroll-tax holiday.
But if Republicans narrowly win control of the Senate and their candidate takes the White House — both of which are possible — a battle royal is likely to ensue. The issue on the table will be government reform, which likely will include transforming government spending as we know it and tackling the daunting task of tax reform — lowering tax rates and eliminating tax breaks. All of which will be both harder and more essential because of the confluence of Taxageddon and the automatic spending cuts.
Americans have grown accustomed to — and in an odd way have come to appreciate — gridlock in Washington. After all, the last time the stalemate was broken in a major way, Obamacare was enacted, which to this day is disliked by a majority of voters, according to the polls.
But at the turn of the year, inaction in Washington will be felt personally by hundreds of millions of people in a way that they have not experienced for decades. Inactivity is, therefore, a choice with real meaning this election year.
Deciding to do nothing will help America’s fiscal soundness and cause pain to millions of Americans. The elections in November will decide how that political equation will get balanced.