As discussion regarding the fiscal cliff begins to get serious, we think a brief summary of the numbers and the scale of issues is helpful.  Here’s a cheat sheet of the fiscal cliff issues. 

 The Congressional Budget Office Reports 

The calculations below are all derived from CBO reports done in August (the “baseline” projection, and one done in November, which analyzes the fiscal cliff item-by-item. 

For simplicity sake, we make comparisons only between the CBO baseline projection and their “alternative fiscal scenario.” 

The baseline projection assumes that all expiring tax breaks are allowed to expire. 

The alternative fiscal scenario is a CBO creation that assumes some, but not all, of the expiring tax cuts will be extended. 

(For definitions of the fiscal cliff and the “alternative fiscal scenario,” please see the notes at the end of this article.)

 The Fiscal Cliff Projections 

Here is the simplest summary of the fiscal cliff scenarios, in table form. The "alternative fiscal scenario" is a CBO speculation on partial action of the fiscal cliff items (see end of article for details). 

Source: Congressional Budget Office

As this table shows, the choice is between economic growth and reducing the deficit. 

 The Cost Of Individual Fiscal Cliff Items

The CBO reports calculate the “costs” of individual items of the fiscal cliff, in terms of their impact upon the deficit and impact on overall GDP.  

The "alternative fiscal scenario" used by the CBO is the first three items in this table combined (numbers below may not add up due to rounding). 

The following table summarizes the impact and cost of various individual aspects of the fiscal cliff. 

Source: Congressional Budget Office

As the above list shows, the “value” of increasing taxes on persons making more than $250,000 is only $42 billion in 2013, or 4% of the total deficit. 

Without trying to sound political, the issue of increasing taxes on persons above $250,000 is almost absurdly insignificant, if the objective is reducing the deficit spending. 

Nevertheless, the CBO calculations indicates, we must either enter a recession or cut spending, as well as raising taxes. 

The Debt Ceiling 

On top of all the fiscal cliff issues, the US is very near to its legally authorized debt ceiling, as shown in the following table: 

Source: US Treasury Monthly Statement Of The Public Debt Of The United States 

Action on the debt ceiling will be needed before the end of January. 

The Choice: Attack the Deficit And Recession OR Growth By Deficit Spending  

The CBO reports clearly spell out two conflicting issues:

• GDP growth requires continued high deficits 
• Attacking the deficit problem means negative impact on GDP growth and employment 

It is clear that some action by Congress is needed and is likely to occur soon. 

The debt ceiling issue alone will require action. 

However, action included as part of that authorization is very hard to predict. 

We think Congress will vote to extend some portions of the expiring tax cuts, although the payroll tax is likely to return to its 6% level. 

Attacking The Deficit 

The fiscal cliff issue is seen by some as an opportunity to make a serious attempt at attacking the deficit problems of the US.

However, the sheer numbers indicate that any serious attempt requires reducing government spending. 

Ironically, the political issue of “taxing the rich” is an almost trivial component of the entire deficit problem. 

At only $42 billion in 2013 (as calculated by the CBO), it amounts to just 4% of the total deficit problem (assuming the projected $1 trillion deficit of the alternative fiscal scenario) and only 4% of the total individual income taxes collected. 

The sequestration cuts mandated by the Budget Authority Act of 2011 have a 50% larger impact on the deficit, and an entire 0.5% more impact on GDP growth. 

However, those cuts apply only to discretionary spending in the US government. 

Furthermore, discretionary spending accounts for only about 40% of the total government spending. 

Social Security, Medicare, and Medicaid spending by themselves are a larger total than all discretionary spending. 

For a serious approach to the deficit problems of the US, spending must be addressed in a major way. 

That means reducing government entitlement programs, which is one step that is clearly visible to voters. 

The Congressional Budget Office did not calculate any GDP impact of possible cuts in mandatory spending programs. This is reasonable since no plan of any type has been placed into debate (except the Paul Ryan plan, which is now an academic only plan). 

Whether the current political structure in Washington has the ability to attack mandatory spending programs remains to be seen. 

Past history is not encouraging, however. Washington prefers to postpone decisions that impact voters directly, although such a course makes the future reckoning even harsher. 

We think the most likely outcome of the fiscal cliff is a modified extension of the Bush tax cuts, revocation of the sequestration cuts, and very minimal cuts in other government spending. 

In other words, more of the same path we've been on. 

Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com 

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Definitions: 

The Fiscal Cliff 

The so-called fiscal cliff consists of the expiration of a number of legislative acts, ane the introduction of new taxes, including: 

• Bush Era Tax Cuts  - the Economic Growth and Tax Relief Reconciliation Act of 2011 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 
• Obama Era Tax Cuts – the American Recovery and Reinvestment Act of 2009 
• Estate Tax Cuts - Part of the EGTRRA, but analyzed separately by the Tax Policy Center
• Expiration of Alternative Minimum Tax Increase, indexed to inflation, also part of the EGTRRA 
• Payroll Tax Cut  - the cutting of the Social Security payroll tax from 6.2% to 4.2% in 2011
• New Taxes created by the 2010 Health Care Legislation 
• Extenders – a variety of short tax provisions enacted individually – these are analyzed as a group by the Tax Policy Center and include such things as accelerated or bonus depreciation for businesses and work opportunity tax credits. (In this summary, we will ignore summarizing these, as they are numerous, but individually small in impact) 

All of these various items either expire or become law on January 2, 2013. 

The total of all these are collectively referred to as the “fiscal cliff.”

The CBO Alternative Fiscal Scenario 

The CBO does not make any predictions as to the likelihood of Congressional action. 

However, the CBO did create an “alternative fiscal scenario,” which is defined as follows: 

• Extension of the expiring tax cuts, except the payroll tax, and indexing the AMT to inflation 
• Elimination of the sequestration spending cuts in the DOD
• Elimination of spending cuts in non-DOD discretionary spending 
• Medicare’s payment rates for physicians remain unchanged from the current amounts

This scenario allows for a more readily digestible analysis of the most likely legislative action on the fiscal cliff.