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Payroll tax deal-What does it cost?
Listening to the talking heads legislators in D.C. over the past few days confirms to me that a deal on extending the payroll tax cut for another year is going to get done. Sure there will be some histrionics, but there will be no tax increase for American workers come January 1, 2012.
This is a far cry from what Obama asked for a few months ago. He will have to be happy to get this. The extension will reduce tax receipts by about $120b for 2012. The deficit will go up accordingly. The economy will benefit. I estimate that the extension will add about 1.5% to GDP. This should give us a shot at achieving 2%+ growth. Absent the extension, the economy would clearly have hit stall speed with growth under 1%.
Republican Senator Dean Heller (R-Nev.) has put up a Bill that tweaks things to suit the Republicans. I think there are some provisions in this Bill that the Democrats will like. There are other items that the Democrats will not like.
The Bill does provide for a Buffet Tax. This would be a 3.25% surcharge on incomes over $1mm. In the scheme of things, this does not raise much revenue ($20b a year?), but it’s appealing to voters. It's all about the optics.
There is a provision to limit the availability of unemployment insurance for high-income workers. That sounds good too. But the numbers are a joke. The tax on unemployment benefits is equal to 100% on individuals who had income greater than $750,000 in the prior year ($1.5mm household). Make what you will of this. My take is that there is not much “austerity” in these limits.
One element of the proposed legislation got a chuckle from me:
PART IX -- DONATIONS TO PAY DOWN NATIONAL DEBT
The deep thinkers are putting into law the terms under which one could make a donation to the government with a designation that it be used to reduce the federal debt.
A law is required for this to establish that the donations are (of course) tax deductible. (Only in America.) I hope the Feds never collect a dime from this. If one had some extra bucks in his pocket, was feeling generous and looking for a tax break, there are an endless number of better alternatives than giving the dough to Uncle Sam. I think this is a dopey idea.
The legislation pays for the 2012 tax breaks buy cutting further the discretionary spending limits that were establish as part of the Super Committee failure.
The numbers in Heller’s legislation are worth considering. The first thing that jumps out at me is that the spending limits from 2013-2021 still total a thumping $10 Trillion. Second, the rate of growth of discretionary spending will fall to a miserly 1.8%.
To get the long-term fiscal picture back to being sustainable, a slow down in expenditure is necessary. The proposed legislation tries to achieve that. However, this long running cap on spending will translate to an equally long-term period of sub 3% economic growth. I wouldn’t be surprised it the GDP gains matched the growth in expenditures in the future. That would mean GDP averages about 1.8% for the next eight years or so.
If 1.8% GDP for the next eight years were the outcome, it would be a disaster. The non-discretionary side of the budget will explode regardless of economic performance. If GDP does not rise by a minimum of 3% (average), tax receipts will fall well below plan, and the budget will explode on its own. We will be at 200% debt to GDP by 2021 if sub 2% growth is in our future.
We either grow or die; but, we can’t grow without bigger deficits and more debt. What do you call this? Dilemma comes to mind. Alternatives include, quandary, tight spot, predicament, impasse or catch-22. A problem, is what it is.
I look at the proposal to extend a 2% tax break to workers for a year, in exchange for what will feel like a very big tax increase in 2013, as a dangerous plan. Yes, it might help for another 12 months. However, we are going to hear (again) that great sucking noise as the tax increases (coupled with the budget limits) come into effect in 2013.
Note: There will be a bunch of additional to-ing and fro-ing on this. It will go close to the Holiday recess. It will be interesting to see how much pork is attached to this Bill in order to get the needed votes. My guess it this will be loaded with payoffs. So much for that austerity thing....
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Well, hopefully Mr. Buffet will add a little "extra" in his check / donation to the US deficit reduction plan. I assume all "rich" will do the same, all is now fixed, so we can go back to spending like drunken sailors.......
Arlene Ackerman was paid a $905,000 buyout to get rid of her as Philadelphia schools superintendent. Now she has applied for unemploment. As part of her separation agreement, the School Reform Commission agreed not to contest any unemployment claims she might file. Her lawyer said, basically, she’s unemployed........
we are screwed whatever they do.
I'm going to put down a negative donantion to the nation debt, maybe -$65,000,000 should do it -- that's about what a metric tonne of Krugerrands might run, right?
They should just think of is as some version of TARP for idea_hamster. And when gold goes to $50k/oz, I'll be happy to repay the nominal loan amount.
Doesn't the GDP have to be at 2.5% for true growth? I'm not an economist or in finance, but pretty sure I read that stat somewhere. In that 2.5%, isn't a large portion of that government spending? Is that true growth if the government is shouldering the burden?
Is there a target number in GDP, minus government spending, that "truly" means growth, or at least some sort of stability? I think $10 trillion really doesn't cut it if we talk simple math here. If we factor that we have $15 trillion in debt just on The Treasury books (not including Fannie/Freddie, The Fed), with a $1.7ish Yearly deficit, wouldn't we need to cut almost $2 trillion PER YEAR for well over 10 years just to even contemplate breaking even?
This may be an over simplification to most, but that's how I read it using basic math. I'll leave the analysis to those that can hopefully clarify this.
You don't understand exponential equations do you? This is how the compound interest equation being forced upon the world by TPTB really works. Infinite linear growth in a world with finite resources and finite energy is impossible, let alone exponential growth. This fundamental disconnect between the paper-pushing fucknuts in economics and those of us who understand the physical world and deliver real products (and not "financial products" of doom) is the reason why it takes more and more debt to get a smaller and smaller bump in reported GDP.
The world is insolvent, the majority of the debt is a FRAUD. It is time for the world to have an adult conversation about i) prosecuting the fucking fraud and restablishing the rule of law and ii) the very real and finite carrying capacity of the earth and the oil economy which currently sustains our quality of life. For example, common sense should tell you that if there isn't enough fresh water to support your local businesses and population now, then how the fuck do you expect to grow AND allow people to have the same quality of life that they are used to? This is fucking impossible.
Wake up! If you are an American, you were enslaved by the Fed and a one world government when the Fed was created and all Americans were stripped of their right to own land free and clear. From that point on all Americans became economic slaves to a banking cartel. The one world government was further strengthened by the creation of the U.N. The Fed and this banking cartel of a relative few families pushes infinite growth on a finite world because their greed is infinite even though the usury is exccessive. Despite this, Americans continue to elect banking puppets, none of who will speak for the people and PROSECUTE the fucking fraud much less end the fed and return the country to it's people.
Good luck.
It has grown to the point that there is just too much fraud to prosecute. About 80% of the government and 95% of the financial oligarchs would be in jail. Who would be left to "run" the place? (I pulled those numbers out of a dark place.) It's just too rampant to follow through! As for myself, I can actually hope that fraud runs totally out of control and brings this system to its knees -- or lower.
I don't know what is needed, there may be some historical number like 2.5% but for me its all a distraction. Assuming we Knew the numbers, which we don't, we might have a shot. However, the discussion is invaluable to politicians....very complicated, unknown figures, approximates here and there, theory, policy, flag-waving, soundbites, class-warfare-----------all provides cover for what has been done for years and will continue to be done, and that is what I like to call spending from the Giant Pretend Account. There are no consequences, there is no fear, no hesitation.
I would sign up for more taxes if I knew where the money went. If it was truly some Act of God, some calamity that got the country in a financial bind and there were clear parameters to assess, recover and exit the problem, sure, I'd pay more.
Unfortunately, this problem did not fall from the sky. Its the cumulative result of bullshit politically driven economic decisions. Now they pretend it has meaning and we all need to pay more? Am I drunk?
This is obviously yet another step in the cunning plan to totally discredit the effectiveness of Congress ... so that a "strong leader" can rule America by presidential decree, under martial law!
Cancelled 2012 election, bitchez!
>What do you call this? Dilemma comes to mind. Alternatives include, quandary, tight spot, predicament, impasse or catch-22. A problem, is what it is.<
We're screwed- that's what!! Paddle faster! I hear banjos!!
Unfortunately the payroll tax cuts do little if nothing to help those that need it the most. The lower wage earners benefit little compared to those that get a $2000 plus benefit. Those on non-wage fixed incomes and social security get nothing at all. Where is AARP and the rest of the fake proponents of the retired and poor? Silence... bought and paid for by corrupt politicians.
The payroll tax cuts will be extended year after year until the economy improves, that should be in 10 to 20 years.
But by keeping the tax on the books, so to speak, all future tax revenue estimates will include the tax expiring in one
year to skew the numbers for congress inorder to allow for more deficit spending.
15.1 and counting
*multiplying
Hey Bruce, great article! Would you mind also sharing your thoughts with an article on what happened with the global intervention by Central Bankers!
What global intervention???
Do you mean that splashy announcement on Wednesday? The one where the five central banks supposedly did something important?
That was just a show pony.
What they did was to lower the interest rate from 1% to 1/2% on $2.4b on swaps.
That's not even a drop in the bucket. I can't imagine what all the fuss is about.
bk
bread & circuses, tried and true
Anyone know what Warren Buffetts salry is each year? $100,000. This is why he is in favor of bilking others. He is nothing more than a wolf in sheeps clothing. A complete phony.
His corporation (wells fargo) Pays for all his goodies...It's good to be king right?
/sarc
When are these clown going to learn? collective borrowing works the same as individual borrowing (despite the keynesian lies) borrowing locks you into a fixed cost of money plus interest...you can't make that plus interest profit (taxing the slaves in this case) your bankrupt....government spending is not growing (their is an illusion)...all it is, is a sugar high, making a profit is growing...government can't do that or refuses too...so we are screwed....
I was actually argueing with someone that actually believes the keynesian lie, It really irks me that people just don't get it...debt is cancer to an economy, you can't pay you default...that's how it works for EVERYONE..greece being an example you can print money but that has way more unintended consequences then admitting you were wrong and defaulting (yeah I know gdp will contract and tax receipts will contract government won't be able to spend blah blah blah...world reserve currency, bonds as collateral settling world trade balances done)
can we please just start the process already? and after it's over ammend the constitution and not allow the government to issue bonds ever again? because as the last 100 years has shown it's refi till the currency die's...first in 1933..then..71...
We ain't making it to 2013 guys, Sorry to break it to you...unless we have another world war to sucker foreigners into the bond market...oh yeah, about those lines being drawn and entangling foreign alliances?
(p.s. Awesome pick Bruce, I've been waiting for someone to post the hurricane with washington and new york...or is that a tornado with them both sucking out all the money?)
I look at the proposal to extend a 2% tax break to workers for a year, in exchange for what will feel like a very big tax increase in 2013, as a dangerous plan.
Well, as a relatively poorly-paid employee, I'd mention that the payroll-tax break has actually improved the quality of my life.
For those of us who are truly right at the boundary of "getting by," it makes a real difference, and given that we spend all our income anyway, it's far more beneficial to that mythical "THE ECONOMY" than it would be to give more money to the folks who are whining about how hard it is to achieve a decent return on investment.
As for it being "dangerous," I'm not sure I see the concern. If payroll taxes are reimplemented in 2013, what's the threat? Those of us who are actually affected by such small changes in income are quite accustomed to being fucked over. Maybe by then the eligibility threshold for SNAP will have risen to my current pay rate, and I'll get to eat a bit better.
I can see where a bit of extra cash could help cover the increases in food prices. As food inflation will continue apace, I can only imagine that a concomitant decrease in take home pay would be doubly painful for those accustomed to being fucked over.
You can't just lump all government spending together, average it and call it useless. It's a lot more complicated than that. Our government sucks, but if it just stopped paying social security, Medicare, the FDIC, and cops all holy hell would break loose. Ineffective government spending has to stop, but runaway deflation helps no one.
"runaway deflation helps no one."
You made sense until you said this. Bullshit, deflation rewards the savers, you know the responsible folks that didn't buy stuff they couldn't afford. Go fuck yourself.
Eh, granted. It's an ill wind that blows no good. Although when you say the savers, deflation only serves the savers who invested in the thing that deflates, cash in this case. So few people have actual hoards of cash that I felt safe ignoring them, but they do very well in deflation. People who save in banks, or stocks, or precious metals, or buisnesses, or houses or any other sort of thing get screwed though. If the government taxes those people to pay off it's bonds then the bondholders do well also. That said though, I would rather lose some value in my investments than suffer a societal collapse, easy to end up the richest guy in the graveyard when countries start going haywire.
Most government spending is complete waste. The government got us into this dependency trap so it could keep sucking the blood out of the middle class. What they want is a fuedal system of nobility and serfs.
ALWAYS someone else is the cause of YOUR problems, yes?
I thought people here were smarter. It was PRIVATE debt that got shifted to the PUBLIC. Yes, I get it that govt isn't all that great (remember: I'm a ZERO govt guy, so spare me the rants about socialism/communism et al), but FAILING to understand THE problem will result in facing the exact same situation, govt or no govt.
THE ISSUE IS UNSUSTAINABLE GROWTH! (though perpetual growth isn't possible)
Anyone who junks me should be prepared to answer the question of how ANY system that they would promote would be able to operate on a finite planet: if you promote growth then you're eventually going to hit the finite wall and, FAIL!
When I look up, the universe doesn't look particularly finite to me. I certainly don't see any walls. The drumbeat of Moore's law doesn't seem to be slowing, either. I'm not sure there is a limit on speed or smallness or efficiency. Maybe someday we'll find a wall, but making one up is like not moving out of the way of an oncoming bus because you'll probably die someday anyway. There is plenty of room for the harnessing of idle or inefficient capacity, and the ending of asshattery like the current US power structure, to keep us all busy for our lifetimes at least. If our kids have to tone it down someday that's their problem. It's our job to give them the best tools possible to address that problem.
Seer: "on a finite planet"
BlakeFelix: "the universe doesn't look particularly finite to me"
Ummmm ... notice the straw man here?!
I see it. Seems an odd restriction though. 99.9999999999999999999999999% of resources are off earth, seems foolish to waste them.
I agree with you when it comes to energy (electromagnetic from the Sun) ... but jumping in the Kombi and heading over to Alpha Centauri for some copper or neodymium?
Does this not advance the debt ceiling to pre Election day?
It was set up to last to January and a new Congress. This $120B moves it how far?
Bruce, you might want to brush up on some of the research posted on this site in the Hoisington letters. It completely invalidates your Keyensian lunacy. The multiplier effect of government spending is less than one.
Government spending,borrowing, taxing or inflation all crowds out efficient capital allocation.
"Government spending,borrowing, taxing or inflation all crowds out efficient capital allocation."
I would argue that the military and all the research and development funded by the government (because private capital will not take the risk) that has lead to new drugs and new technology is a VERY effective allocation of capital fucknut.
Are you saying the allocation of capital by paper-pushing fucknuts so that they can make bad bets only to be bailed out by the taxpayer is a good allocation of capital? Fuck you moron!
Fine, bring the system down, at least then we can find out precisely what the value of everyone's labor really is. Fucking Bring it!
Oh really? You don't know the discoveries and inventions that could have resulted from the same amount of R&D money invested by the private sector. I'd argue we would have much more to show letting the private sector allocate R&D spending than the government. Fuck drugs. Those are extending longevity and making our financial problems worse.
I agree. These are numbers that are being used. It's all a bunch of malarkey.
Generally speaking, one would expect an economic consequence from a reduction in taxes. Normally these things have some knock-on effect.
This comes to an extra $10b a month in take home pay. So it's not hay. Does this sound better?:
"Without the extension the US economy would be meaningfully slower in 2012. The consequence of an additional $120b in debt will be felt over many years. Over time, the current benefits and future expenses result in a net loss to the economy. The increase in debt will not be of consequence in 2012. The politicians (who only want to be re-elected) don't give a shit about the future."
A "slower" economy is an improvement when it's going in the wrong direction already.
So, the ANSWER is a faster depletion of our resources (which include energy)? (an "extension" would mean a "faster" economy)
Yes, no payroll taxes imposed by a centralized govt. But, let's be realistic about how the future really will be even if this were the case. No growth means contraction, and contraction means the reversal of economies of scale: did you (or others) catch Chris Martenson's recent presentation?