The campaigner in Chief lies like a rug...
_______________________________________________________________________________________________ Stimulus Demand: Democrats Won't Fix Fiscal Cliff Without One - Investors.com What is the Fiscal Cliff?
First off, let's define the fiscal cliff. The fiscal cliff is a series of tax increases and spending cuts set to take effect in 2013. Many of these measures have different sources. Some of the tax increases are coming from the expiration of the Jobs and Growth Tax Reconciliation Act of 2003, otherwise known as "the Bush tax cuts." Other tax cuts were included in the 2009 stimulus act. And then, there are some tax increases are coming from Patient Protection and Affordable Care Act, otherwise known as Obamacare.
The chart below summarizes the tax increases, as taken from the New York Times. Image: http://static.cdn-seekingalpha.com/uploads/2012/11/26/212702-13539693668060923-H-J--Huneycutt_origin.jpg Image: http://static.cdn-seekingalpha.com/uploads/2012/11/26/212702-13539693844332042-H-J--Huneycutt.jpg
If you take a close glance at these threatened tax hikes, you'll notice something interesting. While the Administration's rhetoric has largely emphasized how the "wealthy should pay more", the vast majority of these tax increases fall on lower and middle income wage earners.
The chart below shows how the burden is distributed. Image: http://static.cdn-seekingalpha.com/uploads/2012/11/26/212702-13539694025114214-H-J--Huneycutt.jpg
Notice that about 66.4% of the tax increases directly hit lower and middle income earners. This comes mostly from income tax increases, the payroll tax, as well as the elimination of the Alternative Minimum Tax "patch".
Only 9.8% of these taxes would seem to directly hit high income individuals. This would mostly come from the hikes in the capital gains and dividend taxes (a paltry 2% of the overall "cliff"), and income tax increases on higher wage earners.
The other 24.4% is more difficult to make any grand generalizations about, without digging deeper. This would include the "short-term breaks", the estate tax (6% of the cliff), and the Obamacare taxes (about 4%). At least with the estate taxes, we know that this will probably hit mostly higher earners. The New York Times believes the Obamacare taxes also hit high earners, but I'm not sure if I'd totally agree on that. The short-term breaks are likely a mix.
An educated guess then might suggest that about $400 billion of the fiscal cliff taxes will be absorbed by lower and middle income earners, constituting about 75% of the total new taxes. While the other 25%, or $132 billion might be upper income tax increases. In other words, by going "off the fiscal cliff", it would appear that the middle class would be the income group that would suffer the most. Why is the Cliff So Important?
While many commentators have suggested that investors are making too big of a deal about the fiscal cliff, I'd argue that Investors are dramatically underestimating the potential impact of this. A recent article on the Fiscal Cliff … of 1937 highlights the similarities between our modern fiscal cliff and the tax increases instituted in 1937.
If you look at Federal fiscal data, in 1937, US Federal expenditures were 9.6% of GDP, while US Federal receipts were 6.8% of GDP. In 1938, spending increased slightly to 9.8% of GDP, while receipts increased to 8.4% of GDP. From this, we can see that spending stayed about the same, but the tax burden increased significantly - nearly 25% in one year!
The other takeaway from this data: that new money created by deficit spending equaled 2.8% of GDP in 1937, but it fell to 1.4% of GDP the next year. So while there was still a "fiscal stimulus" that was pumping more money into the economy, it was halved in one year.
The important difference to note between 2012 and 1937 is that numbers are much larger in 2012. The Federal budget deficit is around 7.5% of GDP right now. With the fiscal cliff, it would theoretically half, to around 3% - 4% of GDP. So this is similar to the "Fiscal Cliff of 1937", but we're dealing with larger numbers.
As for the results of the "1937 Fiscal Cliff": the US economy contracted 6.3% in 1938. While it would once again rebound in 1939 (with a likely boost from exports at the dawn of World War II), it's clear that the massive tax increases did have a major short-term impact on the economy.
If you're wondering how that impacted the markets, the answer is "it was pretty brutal!" In early 1937, the Dow Jones Industrial Average peaked at 194.40. By mid-1938, it had bottomed at 98.95. In other words, in about fifteen months' time, the Dow Jones lost nearly half of its value!
This is not exactly something I'd label as "not a big deal." The market did quickly rebound in late '38 and early '39, but it's difficult to figure out how much of that bounce was a reversal from market over-reaction and how much was the result of Adolf Hitler's militarism in Europe increasing demand for US exports. LINK
I assume this does not include the military paycuts and gutting of TriCare. No one is talking about that. SHTF and the military get screwed.
Only Obama could do this and be a savior.