It seems every time I turn the TV to a national news channel, someone is talking about how drastic the spending cuts will be if the fiscal cliff goes into effect on Jan. 1, 2013. I have always wondered what that reduction in spending would be, and I ran across a study from the Congressional Research Service (CRS) on the economic effect of these cuts and tax increases.
For FY2013, CRS estimates the total reduction in the deficit would be $607 billion. In broad strokes, this comprises total tax increases of $399 billion, spending reductions of $102 billion and $105 billion in other changes not associated with policy changes.
Of the $102 billion in spending cuts, only $65 billion is associated with automatic spending cuts. Most of the other cuts relate to reductions in unemployment insurance.
Since only $65 billion relates to direct spending cuts, eliminating the 2% reduction in the FICA rate will actually decrease the deficit by $95 billion, which is $30 billion more than the spending cuts.
It seems like the fiscal cliff is not very high from a spending-cut standpoint.
Individual tax increases are about $221 billion, and most people assume this is all due to the Bush tax cuts expiring. This is incorrect. Almost half of this, or $89 billion, relates to the assumption that the alternative minimum tax (AMT) patch will not be extended. Congress has continued to extend the AMT patch each year for several years, but once this number hits almost $100 billion in a year, I am not sure how much longer that will continue.