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The ‘Fiscal Cliff’ Fix—Good, Bad, and Ugly

There’s a lot of good news in the deal negotiated by the White House and Congress that resulted in the passage of the American Taxpayer Relief Act, signed yesterday by the President.

First, we should mention as really good news, the bad stuff that is not in the deal. There is no increase in the Medicare eligibility age or a cut in the Social Security cost of living adjustment (COLA) based on an inaccurate inflation index for the elderly, the chained CPI. In other words, this deal did not target the basic programs that retirees and many of the disabled, including disabled veterans, rely on. These benefits have not been cut. This is good news because so many Americans, especially older women, who are the majority of the elderly, rely on these programs for the vast majority of their income. This is a huge victory for the large coalitions of organizations working to protect these programs from cuts and to improve their benefits. Although many pundits, CEOs, and newspaper editorial boards assume that cuts in these programs are needed to reduce the deficit, that is simply not so. Without more effective cost controls on health care in general, cutting Medicare benefits would simply shift costs from a government program paid for by workers’ life-long contributions to other retirement resources they may have and increase health care costs overall. Similarly, cutting Social Security benefits would force retirees to rely more on other retirement income or assets, which—for most retirees—have been shrinking due to the Great Recession and the slow recovery. Many retirees would simply see their standard of living fall—some would fall into poverty. The solution is not cuts to these programs, but controlling health care costs and raising more revenues. For example, removing the cap on earnings so that all workers pay the same tax rate for Social Security (the cap for 2013 is $113,700—dollars earned above that amount are not assessed any Social Security tax) would solve all of Social Security’s long-term funding shortfall (a shortfall not expected to occur for another 20 years anyway).

More good news: Important Obama tax credits for low and middle income families, such as the expanded child tax credit, the expanded Earned Income Tax Credit, the American Opportunity Credit–a tuition tax credit—are renewed for five years. And the Bush tax cuts for the rich, which President Obama had previously agreed to extend for two years through the end of 2012, have now been eliminated for individuals making more than $400,000 per year and married couples making more than $450,000 per year. The ending of this cut for the rich, in place since the early years of the Bush administration, amounts to the first significant increase in income tax rates in many years. In addition some cuts in allowable exemptions will affect those earning above $250,000. Compared with policy current as of December 31, tax rates on dividends and capital gains are also higher than they were for higher income filers (increased from 15 percent to 20 percent).  The tax rate on estates valued at $5 million and up ($10 million for married couples) has increased from 35 percent to 40 percent. These higher rates, along with the lower income taxes for everyone earning less than $250,000, have been described as “permanent,” which should provide some sense of security going forward. (Of course, Congress could change these rates at any time—but they don’t have a sunset date as the original Bush tax cuts did.)

Another important positive is the extension of federal unemployment benefits for those looking for work for more than 26 weeks, preventing cutting off benefits for 2 million unemployed and giving them a lifeline for another 12 months.

Some of these provisions are also the bad news: had the fiscal cliff not been negotiated away, we would have fallen over the cliff, and tax rates on estates, dividends, and capital gains would be higher yet, and the income level for the elimination of the tax rate cuts would have corresponded to the level the President campaigned on ($200,000 for individuals, $250,000 for married couples), so some critics may feel the White House lost tax revenues here that it should have held onto. After all, reducing a deficit can be done either by cutting spending or by increasing revenues, and, for women, who depend so much on government programs (Title X family planning funds, for example, or services for domestic violence victims) any loss in potential revenue and failure to harvest new revenues likely means bigger future cuts to programs they rely on.

Other bad news: the payroll tax cut was not extended.  For the past two years, most workers paid a contribution deducted from their paychecks of 4.2 percent of their earnings for Social Security instead of the normal 6.2 percent. This reduction, always seen as temporary and originally passed for one year, and then extended for a second, helped to stimulate the economy during the weak recovery of 2011 and 2012, by adding about $120 billion to consumer demand each year (not counting multiplier effects). What this means is that many low and middle earners will actually see their taxes increase—they will still get the income tax rate cuts that are now permanent and the Obama tax credit expansions but those will be more than offset by the payroll tax increase that supports Social Security. This is bad news for millions of families and for the overall economy, which still needs more stimulus, not less.

The ugly is what remains to be negotiated: the sequester and increasing the U.S. Government’s borrowing authority. The sequester is a nine-year planned cut in expenditures of approximately $110 billion per year, including both defense spending (50 percent) and discretionary non-defense spending (50 percent) that would have gone into effect automatically on January 1, 2013, had this fix, which extends that deadline 2 months, not gone through. A two-month delay is good because those are huge cuts in spending that could trigger an economy-wide downturn, but the delay may not be long enough to allow the crafting of good alternatives.  In fact, the just-inked deal includes $12 billion in spending cuts that are a down payment on future anticipated cuts.

At the same time, Treasury Secretary Timothy Geithner has announced that the U.S. Government has now reached its borrowing limit and is using extraordinary measures to make sure we can pay all our bills. While many of the pundits and CEOs mentioned above, as well as some centrist members of Congress from both parties, are arguing for cuts in spending rather than more revenues as a way to downsize our deficits, it is the Republican members of Congress aligned with the Tea Party who are demanding significant cuts in federal spending, particularly in Social Security, Medicare, and Medicare, in exchange for raising the debt ceiling. Perhaps they have not seen the survey research that shows that adults of all political parties (including the Tea Party) oppose cuts in benefits provided by these programs.

In the next two months we are certain to see some more really big battles to protect critical programs for all Americans, programs which are even more essential for women.

Heidi Hartmann is the President of the Institute for Women’s Policy Research.

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