In the final hours of December 31, 2012, congress and the democrats agreed on a deal in the White House that averted the fiscal cliff in the US and saved the economy from slipping away into darkness. But for how long?

According to Forbes magazine, income tax rates up to $450,000 (for married couples) will be subject to older tax rates, but income above $450,000 will taxed at 39.6%. Tax-rates on long term capital gains and dividends will be hiked from 15 percent to 20 percent only for those taxpayers above; for everybody else it will be the same 15 percent.

Further, according to Forbes, the deal is composed of an extension of exemption on estate taxes at $500,000, but rates have been increased to 40 percent from 35 percent.

It seems rather uncomfortable to say that President Obama achieved victory on tax code debate since democrats were pushing top tax rates for income just above $250,000; nevertheless, tax revenues have been made somewhat stronger.

As reported in my last article, updating tax rates for the rich may strengthen the revenue part of the budget. Perhaps it is a good sign, but the deal barely mentions anything about chronic deficits.

Perhaps the most pivotal portion of budget is spending. Because spending and taxes are branches of the same tree, and there is a threat that the tree might lean to one side if the other branch grows too heavy.

According to the Heritage Foundation report, “Federal spending by the Number 2012,” federal entitlements are driving this spending growth, increased from less than half of the total federal outlays some 20 years back to nearly 62 percent in 2012.

Further report says that three major programs (Medicare, Medicaid, and Social Security) eat up about 44 percent of the budget. Other programs such as anti-poverty program increased by 49 percent in the last 10 years, food stamps tripled since 2002, and housing assistance rose by 48 percent since 2002.

Debt Facts

The year 2012 marked $1.1 Trillion of deficits, the fourth consecutive year the deficit exceeded 1 trillion.

The 2012 Deficit. was estimated to be 7.3 percent of the GDP.

Over 2 decades, spending grew 71 percent.

In 2012, spending on entitlements was nearly 62 percent of total spending, while defense expenditure was 18.7 of the budget.

The US economy is drifting towards deeper deficits for two principle reasons: a dramatic shift in spending on the outset of recession, and a large chunk of financial resources diverted towards a host of social programs.

What’s happening in the US economy can be summed up as a fiscal fiasco. It is also economic uncertainty and political confusion over the fate of the tax code, massive spending and mountainous federal deficits, since this deal focused extensively on one side of the budget.

Ironically, what remains to be the most awful aspect of the deal is the extension of rapid spending cuts, generally known as sequester. The sequester problem should have been solved under this deal.

According to the Christian Science Monitor, ‘sequester’ is composed of mandatory spending cuts, hammering down $600 billion in defense and $600 billion in domestic programs, which have been extended to March 1, 2013.

Are we going to experience the same kind of frustration and confusion again in March as we did prior to this deal? Fiscal deficits are a jinx to growth and the whole of the economy because it forces us to cease off-spending.

But again a question arises whether welfare policies sometimes ask for more than what the economy can produce? Is this too much welfarism?

Share This

• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 

About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.

1 Comment for Fiscal Cliff Deal and Deficit Dilemma

Asif iqbal

Sizzling work ,amazing example, beautiful flow of economic and political thoughts, attacking tan-gently at last.
I like more than any article of your’s Mr writer
Keep-UP you the GOOD WORK

Reply