Fact Check: ‘Fiscal Cliff’

Chip Tuthill

Mancos, Colorado

The fiscal cliff refers to the effect of a number of laws which (if unchanged) could result in tax increases, spending cuts, and a corresponding reduction in the deficit beginning in 2013. Some major programs, like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans’ benefits are exempted from the spending cuts.

The Budget Control Act of 2011 specified automatic procedures to reduce both discretionary and mandatory spending during the coming decade. Those automatic reductions will take the form of equal cuts ($984 billion in dollar terms) in funding for defense and non-defense programs in fiscal years 2013 through 2021.

For 2013, those reductions will be achieved by automatically canceling a portion of the budgetary resources (in an action known as sequestration) for most discretionary programs as well as for some programs and activities that are financed by mandatory spending. Diverting from that path to continue current tax and spending policies would improve the economic outlook in the short run but would boost deficits and debt significantly and would place the budget on a path that is ultimately unsustainable.

Raising taxes and the effects of sequestration have generated many false claims. U.S. Rep. John Boehner, Nov. 9: “The problem with raising tax rates on wealthy Americans is that more than half of them are small-business owners. Raising tax rates will slow down our ability to create the jobs that everyone says they want.” The Treasury Department’s Office of Tax Analysis looked at the issue using a more realistic definition of “small business.” It shows that more than 90 percent of small-business owners wouldn’t be affected by President Barack Obama’s proposal to raise taxes on individuals earning more than $200,000 and couples earning more than $250,000. Ninety percent of those affected by the tax increase are not small-business owners.

The notion that small businesses are necessarily “job creators” is also a big exaggeration. According to a Treasury report, “Slightly more than one-fifth of small businesses” qualify as an “employer.”

Boehner, Nov. 7 press conference: “The independent accounting firm Ernst and Young says going over part of the fiscal cliff and raising tax rates on the top two brackets will cost our economy more than 700,000 jobs.” Boehner is referring to a study prepared by two economists at Ernst & Young on behalf of pro-business groups: the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce — all of which lean strongly Republican. The projection assumes the revenue generated by raising taxes on those making over $250,000 would be “used to finance additional government spending.” The report did not examine what would happen if the additional revenue were used to reduce future federal deficits.

A footnote at the bottom of the report explains that “roughly two-third to three-quarters of the long-run effect is reached within a decade.” In other words, when the report cites the loss of 700,000 jobs, a quarter to a third of those job losses would happen more than a decade from now. The Congressional Budget Office reported allowing the Bush tax cuts to expire would result in a 1.4 percent inflation-adjusted increase in the GDP (and 1.8 million jobs). Conversely, if the Bush tax cuts were extended only for those who earn less than $250,000, then the GDP would rise 1.3 percent (and add 1.6 million jobs). The House Ways and Means Committee Democrats noted in a Nov. 8 press release that only 0.1 percent of GDP and 200,000 jobs are attributable to the upper-income Bush tax cuts.