Like many politicians, President Obama made plenty of promises during his re-election campaign last year. One of the most important was his promise to fight for the middle class by instating tax cuts for middle class and small businesses. However, many middle class Americans still see their first paycheck of 2013 with little disposal money.
The deal to avert the fiscal cliff was sealed, hallelujah. It looks like a glorious victory for President Obama, because the marginal tax rates on the wealthy were permanently raised and taxes on capital gains and dividends will also spike dramatically, from 15 percent in 2012 to 23.8 percent in 2013.
On the other hand, Republicans seem like losers. For the first time in more than two decades, — they voted, by a large number, for higher taxes without holding Obama to his promise of cutting spending.
But the biggest loser is the economy. The negative impact of the fiscal cliff deal appears to be imminent in months ahead.
The first quarter of 2013 will likely witness dwindling consumption. Because the deal didn’t stop the payroll tax cut from expiring in addition to an increased Medicare tax, more than 80 percent of households with income between $50,000 and $200,000 will pay higher taxes, according to Tax Policy Center, a nonpartisan think-tank in Washington, D.C. The average annual increase will be $1,635. Ironically, the tax burden will raise more for someone making $30,000 a year (1.7 percent) than it does for someone earning $50,000 a year (1.3 percent).
With tax hikes like these, households tend to tighten their budgets, constrain consumption, and save more to counter the uncertainty facing in the future. Economists estimated that the expiration of a two percentage point payroll tax cut would reduce the purchasing power to $115 billion, or roughly $1,000 per working household.
Small businesses are also being hit hard by the fiscal cliff deal. Small business owners have to pay Obamacare surtax on investment income (3.8 percent) and Medicare (0.9 percent), as well as the current Medicare tax of 1.45 percent. Small businesses are widely considered the engine of economic growth.
OECD affiliated economists ranked the most harmful taxes to economic growth. They found that corporate taxes are the most harmful, followed by personal income taxes, consumption taxes, and finally, property taxes. Such burdensome taxation will hurt small businesses, thus closing the door on economic growth.
One of the mistakes Republicans admitted to was that they failed to get the president to agree to cut spending. John Boehner, the Speaker of the House, told Wall Street Journal’s Stephen Moore that President Obama doesn’t even think Washington has a spending problem and ignored his calls for negotiation of raising revenue in return for cutting spending.
Boehner said the only way to strengthen long-term economic growth is to reduce the nation’s debt through entitlement reform and tax reform. But such a deal is hardly expected to resonate with a president who doesn’t think Washington has a spending problem.
In just two months, the White House and Congress will face another dismal talk over another “cliff” — the debt ceiling cliff. Given the dilemma that either raising the debt ceiling will slow economic growth or bonds will be downgraded by credit agencies, even the most optimistic economists would hardly predict that the recovery will not to turn into a recession.
