And now, back to the Fiscal Cliff
David Kotok: Taxes up, spending down, but not so much as might have been, with Obama and a divided Congress headed back to Washington
And now, back to the Fiscal Cliff
After Obama's re-election: "The almost interminable season of acrimony is over," David Kotok, chief economist at Cumberland Advisers in Vineland, told clients in a note. "The Obama-led wing of the Democrat party will continue leading the nation in finance, economic matters and social direction.
"One hopes the nation sets aside the meanness that we have witnessed and becomes serious about compromise. Issues need to be addressed. This process starts in the lame-duck session of Congress.
"The spending side debate has been beaten to death in the press and during the campaign. Any more discussion of the Ryan plan or the Simpson-Bowles plan or other plans is likely to induce nausea. The time has arrived for action.
"The catch phrase is 'fiscal cliff.' Both candidates allowed voters to infer things from their political vagueness and attacks on each other. Neither was direct and honest with the voters. Their advisers kept them from being specific, since specificity opens the candidate to distorting attacks by the other side. Now the re-elected president must immediately act to avoid the cliff."
Kotok cited Charlotte, N.C.-based investment economist John Mauldin's summary of the famous cliff, the federal tax hikes and budget cuts that will take place automatically, sparking a contraction of the economy that will slow hiring and spending, if Congress doesn't intervene. These include:
- The end of the Bush tax cuts, which will boost taxes on wealthy and middle-income workers by $265 million a year, or nearly 2 percent of gross domestic product. Democrats want to limit boosting tax rates to people earning over $200,000; Republicans say if taxes go up they should go up for most workers together.
- The Budget Control Act, the compromise Republicans demanded for boosting the debt ceiling so the government could borrow more, would shave $160 billion from the national budget, with about two-thirds of that "sequestered" for defense cuts.
- Obama's 2 percent Social Security tax break and extended unemployment benefits would end, boosting tax collections by $140 billion and cutting paychecks immediately.
- The 'ObamaCare' tax increase on high-income households, which will raise another $24 billion, will also take effect.
- Scrapping the Alternative Minimum Tax and other scheduled tax simplifications, which are supposed to bring in another $105 billion, again at taxpayers' expense
Kotok said both campaigns downplayed the likelihood and threat that at least some of these giant tax increases and budget cuts will be enacted even if Congress acts to limit the short-term damage. "We expect no change in this congressional deception in 2013," he added. "Election night celebrations aside, the lame-duck session negotiation has already commenced. It is influenced by the election outcome as each side tries to determine whether a deal now is better than a deal next year."
While Democrats kept control of the Senate, they lack a 60-vote majority that would enable them to force quicker action. So they will have to compromise freely with the Republican-led House of Representatives, and vice versa, on reconciliation bills that require simple majorities of both Houses. "A deal is possible in the lame duck [session] if enough Republican Members of Congress can be bought off" by Christmas, Kotok concludes. "But it may be easier to go over the cliff" and save the deals for the new Congress. "Massive negotiations lie ahead," but "hope of real reform is wishful thinking. Flat taxes or simplification are not likely when the government remains divided."
What does this mean for jobs and investments? Stock and bond markets "fear uncertainty," and so do employers. The election has removed some uncertainty, with Obama's victory and the Democrats' stronger-than-expected Senate showing making higher taxes likely and spending cuts less likely. "The greatness of America is that we tolerate this bizarre system and then move right on," Kotok concluded. "The fog is lifting. We hope."