Yesterday the Prez put his proposal on the table about what to do with the Fiscal Cliff the country faces at the end of the year. What Obama said is important. What he didn’t say is critical.
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It should come as no surprise that Obama has proposed an extension of the Bush tax cuts for those workers earning $250,000 or less and a tax increase for those making above $250,000. The extension of the tax cut for those earning under $250k will have a cost of $150B according to the White House:
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The President’s proposal appears to be “tax progressive” in that it benefits workers on the middle to lower end of incomes. The plan is clearly designed to get some votes in the key political states of Ohio and Pennsylvania. Who knows? Maybe some suckers will actually cast a vote for Obama as they think he’s standing up for those on the lower rungs of the income profile. Baloney!
What the President didn’t say in his speech yesterday is far more important than what he did say. He did not say word one about the 2% Social Security tax break that has been on the books the past few years. What this means is that the FICA tax break is going to expire. When it does, every worker’s paycheck is going to get hit by 2%.
In the 2012 Social Security Trust Fund report to Congress the Trustees estimated that total FICA (SS taxes) would amount to $733.4B in 2013. The 2% increase in FICA taxes in 2013 will increase workers tax load by $120B. Therefore the combined effect of extending the sub-250k tax cut and the increase in FICA comes to a paltry $30B.
Even worse is the way in which the increase in FICA taxes will be felt by workers making $60K or less. (The average annual wage in the US is $42,000). Households in the lower tax brackets will not get much benefit from extending the Bush tax cuts, but they will, on average, see their take home pay reduced by $1,200 a year.
The President’s tax proposal is a half-assed compromise. It is not progressive. It does nothing for the economy ($30b is chump change). If workers earning an annual income close to the average understood how this tax proposal would work out for them, they would reject it. I find it interesting that Obama is selling his plan as a middle class tax cut that aids small businessmen when in fact it is a lower-income tax increase that has no beneficial consequences to the economy.
The President’s tax plan was just a show pony to get some votes. It does not have a snow ball’s chance in hell of passing. But it is a window into the real debate that will happen after November. Some form of compromise on the fiscal cliff will have to be reached. Some taxes will go up, others will stay where they are. The net effect will be that there is no real improvement in the deficit, nor will there be any meaningful stimulus to the economy from the fiscal side.
In other words, we are going to deeper into debt, and the economy will stink. I can’t see a way around that conclusion.
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