Does The Fiscal Cliff Really Make Drastic Cuts in Spending?

• October 1, 2012
• Paul Neiffer

It seems every time I turn the TV to a national news channel that someone is always talking about how drastic the spending cuts will be if the Fiscal Cliff goes into effect on January 1, 2013.  I have always wondered what that reduction in spending would be and I ran across a study from the Congressional Research Service on what the economic effect of these cuts and tax increases are.

For FY2013, the CRS estimates that the total reduction in the deficit would be about $607 billion.  In broad strokes, this is comprised of total tax increases of $399 billion, spending reductions of $102 billion and $105 billion of other changes not associated with policy changes. 

Of the $102 billion of spending cuts, only $65 billion is associated with actual automatic spending cuts.  Most of the other cuts relates to reductions in unemployment insurance.

Therefore, 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 spending cuts.

It seems like the Fiscal Cliff from a spending cut standpoint is not very high.

Individual tax increases are about $221 billion and most people assume that 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 AMT patch will not be extended.  Congress has continued to extend this AMT patch each year for several years, but once this number hits almost a $100 billion in a year, I am not sure how much longer that will continue.

Paul Neiffer

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