The Fiscal Cliff "Deal"

Right after we rang in the new year, Congress rang in the new year with more disastrous legislation.  Of course, it isn't disastrous for them.  It is disastrous for the average American.  Most of the tax rates on income were kept in place and not allowed to go up.  This did not include tax rates on high income earners (single filers with an income over $400,000 and married filers over $450,000).  We often hear them referred to as the "wealthy", but high income earners is a far more accurate term.  You could have someone win Survivor (the reality show) or have a lottery winner and that person may only be a high income earner for one year.  It does not mean the person is necessarily "wealthy".

I'd say the biggest thing that will affect most Americans in the short run is that the payroll tax cut did not get extended.  The Social Security portion paid by employees will go back up from 4.2% to 6.2%.  So any low or middle income American will see 2% of their take home pay disappear.  This affects any person working in the U.S. who is reporting income.  This hurts the low and middle income brackets disproportionately.  (And it is not a "premium" for Social Security because it isn't going into your own account.  There is no actual money for Social Security.  It has all been spent.)

Having Congress agree to allow the payroll tax cut to expire should tell us something.  It means that they are even a little scared of the massive deficits.  The Laffer Curve does not apply much to the Social Security payroll tax.  While it could hurt economic growth and employment eventually, it will not do much to change the behavior of workers.  It is not like someone earning $40,000 per year is going to work less because he is paying an extra $800 per year to the government.  So, at least in the short run, the higher payroll tax will probably lead to more "revenue" to the government.

It is no surprise that the Congress is also kicking the can again on spending.  This was easily predictable.  It is the opposite of what we need.

From everything I've read, it looks like no actual cuts will be made.  Anything referred to as budget cuts is actually just a smaller increase in future budget projections.  There are no cuts.  This will just make the day of reckoning that much worse.  As the days go on and things are looked at closer, we will see more pork and more items to favor those who are the most well-connected to the government.

By the way, if the Republican Party really were the party of smaller government, then it would still hold  an ace in the deck.  The Republicans have a majority in the House, which controls spending.  An easy way to balance the budget would be to refuse to raise the debt ceiling.  For right now, Geithner and the Treasury are coming up with tricks (accounting fraud for anyone else) to prevent default, even though the government debt has already passed the debt limit.

But don't worry.  The Republicans will capitulate on the debt ceiling too.  I'm sure they will raise it by another couple of trillion dollars.  They don't want to actually cut any spending.  They just want to continue to trick and deceive their constituency into thinking that they really want to cut spending.

At this point, my only advice is to not pay too much attention to all of this garbage.  We are still going off the fiscal cliff and the monetary cliff and the debt cliff.  It is unavoidable.  I would suggest that you prepare for it in any way you can.  And since there is not much you can do to stop the hacks in Washington DC, try to focus on things in your own personal life to help you and your family.  It looks like the economy will have to get worse before things can get better.