The patchwork legislation signed into law last week leaves more work for the newly-sworn-in 113th Congress – or its successors. Tax increases have been spread across the economic spectrum, but the issue of the $16.4 trillion debt ceiling is still out there, having gone unaddressed in the new law. The government now has about two months to allocate money to stay within the debt limit before the debt ceiling turns into the next fiscal policy crisis.
This comes shortly after the Federal Reserve’s historic announcement at its December meeting that it will tie monetary policy in part to the unemployment rate and inflation. But Fed Chair Benjamin Bernanke notes that monetary policy must be complemented by sustainable fiscal policy.
We’re still waiting for that last one. Last week’s legislation can only be regarded as a preliminary sortie in the budget balancing war. The Bush administration tax cuts for individuals earning less than $400,000 a year and couples earning less than $450,000 were made permanent – at least in this package. But tax rates on those earning more have gone from 35 percent to 39.6 percent, to raise about $600 billion in revenue over 10 years. The rise of the capital gains tax from 15 percent to 23.5 percent will affect sales of high-end real estate, as we observed in this space last month.
However, for the vast majority of taxpayers, the immediate effect of the new law will be – meh.
While only 0.7 percent of households will see an income tax increase, 77 percent of households will send more money to the government this year, according to the nonpartisan Tax Policy Center. The extension of the Bush tax cuts will largely be offset by the sunset of a 2 percent Social Security payroll tax break, which will pinch the paychecks of earners making up to $113,700. Earners making $30,000 will take home $50 less a month, according to estimates in a CNN report. Those at the $113,700 level will lose $189 per month.
Lawmakers’ dithering has kept payroll administrators in limbo until the very end of the year, regarding withholding schedules for 2013 – which, for many businesses, started before year end, after the last full pay period in 2012.
Enter the Federal Reserve, which controls the money supply and establishes the interest rates that impact every aspect of commerce. Its unprecedented policy shift brings it into qualitative easing, in addition to the quantitative easing it has been implementing for the last several years. There’s a difference: quantitative easing hinges on “when” and qualitative hinges on “if.”
The Fed set 6.5 percent or less unemployment, as long as inflation remains at 2.5 percent or below, as thresholds at which it would consider modifying its quantitative easing strategy by raising interest rates.
Then, in a question and answer period after the meeting, Bernanke noted that while the point of Fed policy is to create more jobs, it cannot control unemployment in the long run.
He added that the Fed does not possess the tools to offset the fiscal cliff, and called for modification of fiscal policy in a way that is non-disruptive and lays the groundwork for a sustainable fiscal-policy path.
As noted above, we don’t have that yet. The government’s inability to give timely guidance to humble and beleaguered payroll administrators doesn’t augur well for its ability to provide a solid economic-recovery framework for the businesses that are supposed to hire the workers who will get the economy moving again.
“Don’t say I didn’t warn you,” Bernanke indicated in his December remarks. The 113th Congress has a formidable job ahead.
