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Scheduled to take effect at the beginning of 2013, an array of looming federal budget cuts and tax increases collectively referred to as the “fis- cal cliff” were averted by a deal reached just twohours after the midnight deadline, narrowly helping the country avoid a plunge further into recession. Professor Peter Rupert, Chair of UCSB’s Economics Department, weighed in on the deal and gave his views on the future of American financial stability.
With the end of 2012’s temporary payroll tax cuts and the 2010 Tax Relief Act, along with other planned cuts in spending, December 2012 called for quick action by policymakers to uphold the nation’s economic standing.
According to Rupert, had the American Taxpayer Relief Act of 2012 not been passed, a set of political measures would have been enact- ed that economic experts predicted would have had detrimental consequences for the economy’s health.
“The fiscal cliff was a politically made con- struct that set in place several things many peo- ple thought could be harmful to our economy … As of Jan. 1, 2013, several things were going to transpire,” Rupert said. “Number one: there would be an automatic sequestration that would cut government spending. Number two: all taxes for every income level would rise. Third: the payroll tax holiday would end.”
However, though the ensuing compromise passed through the Senate and onto the Houseof Representatives, Rupert said very little was concretely decided upon and bipartisanship greatly slowed the process.
“In this situation, no one won,” Rupert said. “Obama had promised that he would increase taxes on all people who made over $250,000 [a year] and Republicans had said, ‘We will not agree to any tax hikes’ … There were tax hikes, but for people [making a salary of] over $400,000 and for fami- lies [making] over $450,000.”
The political mishandling of the fiscal cliff drew out negotiations until the last possible moment, creating a pan- icked atmosphere in the nation, according to Rupert.
“What was really bad was waiting until the night of the thirty-first, not knowing at 11:59 p.m. [what changes would be made]; that’s bad politics,” Rupert said.
The deal worked out in the first days of 2013 was more centered on dealing with issues of short-term taxation as opposed to national spending cuts and delayed facing auto- matic spending cuts for another two months — in essence creating another fiscal cliff.
“What has happened with his compromise? It has not done the things people had hoped it would do. It has not changed, effectively, our tax and spending policies that would have a long-term effect on the debt,” Rupert said. “The poli- cies in effect will only save about 60 billion [dollars] per year … that means in ten years from now, we’re still going to have a huge debt. This is not a long-run solution; it is a bad aid at best.”
The new year also meant an end to the Bush payroll tax cuts, which lowered the tax rates for the highest income bracket from 39.6 percent to 35 percent. Set lower duringthe recession, the expiration of the social security tax break resulted in the loss of the two percent pay increase Americans enjoyed for the last two years.
Rupert said the tax cuts were originally intended to stimu- late the economy by increasing personal income and therefore spending.
“Americans have less income to take home. The reason we had the Bush tax cuts in the first place was to get people to spend more, to get firms to hire more people, and so on,” Rupert said. “Bush, and Obama later on, said, ‘Look, we know that lowering taxes gets people to work more and take more money home … it is not the time to raise taxes.’”
According to Rupert, this poor navigation of the fiscal cliff was a missed chance for improvement that has only fur- ther delayed the problem instead of delivering a solution.
“To me, it’s a very sad thing. We had the opportunity to look at serious tax reform and serious spending reform … Having said that, we’re not done with this yet. Two months from now we’re going to hit the debt ceiling again and that’s a new fiscal cliff,” Rupert said. “Two months from now, if con- gress does not vote to raise the amount of debt, we’re going to have to default on some of our debt.”
The U.S. debt ceiling currently rests at $16.394 trillion — about $2.4 trillion more than it was in 2011 when a similar situation occurred. According to Rupert, the much-needed changes to U.S. economic policies were not made, and a new deadline will be set where a concrete decision on our national debt must be reached.
“If we don’t vote on that particular day to increase the debt ceiling … there is some of our debt that we can’t pay back,” Rupert said. “The U.S. has never defaulted on its debt. I don’t anticipate the U.S. will ever default on its debt.”
A version of this article appeared on page 1 of January 10, 2013′s print edition of the Nexus.