Politicians in Washington may have reached a compromise on the so-called “fiscal cliff,” but there are still major issues to be discussed in the coming months regarding spending that could have major implications for the economy, according to one East Tennessee State University economics professor.
Douglas Dotterweich, an economics professor and urban and regional economist, said the most significant thing to come out of the tax package Congress passed New Year’s Day was in regard to revenue because the deal will raise about $600 billion over 10 years.
“It sounds like a lot but it’s not a lot considering where we are,” Dotterweich said.
But Dotterweich said the big issues now are what were not addressed in the bill: The nation’s borrowing limit, entitlement spending reform and tax reform.
“Maybe it’s more what didn’t happen than what did,” Dotterweich said. “Because it’s back to where it was before, at least for another two months.”
The issue of government spending was postponed for two months for politicians to debate how to handle entitlements and other expensive government measures. Entitlement spending includes things like Social Security and Medicare.
Had the issue of the “fiscal cliff” not been resolved at least in part, massive spending cuts would have gone into effect.
Now politicians have given themselves time to discuss what to cut and how much.
“And those are the difficult questions,” Dotterweich said. “This (deal) is kind of a like a Band-Aid to get us to the next step. There weren’t many long-term solutions that came out of this bill.
“I think it’s good to get an agreement rather than no agreement,” Dotterweich said.
Dotterweich was not sure what would happen in two months, but he thinks the federal spending limit will increase to avoid problems and allow the country to meet its obligations. He also is not sure what will be decided about entitlement spending.
“The problem is the longer you delay, the bigger those problems become,” Dotterweich said.
The situation has created a broken fiscal policy, Dotterweich said, because the country is operating at a deficit. In fact, in the past 30 years there has only been one budget surplus.
Dotterweich said a structural change in tax collection and entitlement spending would lead to a normal fiscal policy situation where taxes decrease and spending increases during recessions and taxes increase and spending decreases during inflationary or expansion periods.
Anyway, despite the deal reached by Congress, most Americans will have more money taken out of their paychecks because the temporary reduction in the Social Security payroll tax expired. According to the Associated Press, in 2012, that 2-percentage-point cut in the payroll tax was worth about $1,000 to a worker making $50,000 a year.
Households making between $40,000 and $50,000 will face an average tax increase of $579 in 2013, according to the Tax Policy Center’s analysis, the AP reported. Households making between $50,000 and $75,000 will face an average tax increase of $822.
“It’s not necessarily a big reduction but it depends on your income level,” Dotterweich said of the payroll tax.
Dotterweich said now that a deal has been reached, businesses can be certain the capital gains tax rate will increase from 15 percent to 20 percent. The merits of the increase are likely debatable but Dotterweich said at least now businesses know what the rate will be and can use that information to function.
“Businesses don’t like to make decisions if they don’t know what the outcome of the decision is,” Dotterweich said.
Families can be certain now too that taxes will not go up and things like the $1,000-per-child tax credit remain in place.
Medicare payments to doctors will also not go down by 27 percent, as was the plan if the country had gone over the fiscal “cliff.”
“The only thing is that’s going to cost all of us more now as a result of that,” Dotterweich said. “You’ve got to pay for it somehow.”