It is different this time. But it won’t be better.
If lawmakers on Capitol Hill feel they can risk shutting down the federal government because the economy is in better shape — or that the deficit is coming down — they’d better think again.
The annual federal budget deficit was regularly running well over $1 trillion when Washington chaos’ed earlier this year.
The threats this week to shut down the government come at a time when the Congressional Budget Office is projecting a deficit of only $642 billion for the fiscal year that ended Monday.
You have to chuckle at the word “only.”
A deficit of $642 billion is still a very large number — nearly four times the shortfall the US had in 2007, which we can now officially refer to as the good old days.
People who don’t understand why the deficit shrank might be tempted to wipe the sweat off their brows and proclaim, “Thank goodness.”
Those fools on Capitol Hill — whose bumbling on funding the government shaved 128.57 points off the Dow Jones industrial average Monday — might want to hold off on that sentiment.
Our political leaders today are working on the assumption that the deficit is declining. And while they may be sweating the details of a possible government shutdown, the Republicans and Democrats are probably a little relieved by the fact that this current mess is coming at time when the CBO thinks our nation’s fiscal situation is improving and can stand some stress.
It’s my job to tell the other side of this story.
To do that, let’s take a stroll down memory lane, to roughly nine months ago, when the current Washington crisis was first conceived. If you haven’t blocked it from your memory, you might recall that people suspected late in 2012 that taxes would be going up this year.
Those tax increases plus automatic spending cuts were forced on Washington by a credit-ratings firm that threatened to lower the rating on US debt if drastic action wasn’t taken. There were a lot of other moving parts in this deficit- reduction machine, but those are the two most important — tax increases and budget cuts.
The spending cuts occurred through something called “sequestration,” which automatically cut government spending by about $85 billion.
The tax increases came two ways. One was in the form of higher rates on upper-income Americans. The other: Everyone was forced to pay more into Social Security when a tax holiday was ended.
There was nothing anyone could do about the 2 percentage point increase in Social Security payments. But there was plenty rich Americans could do about the other tax hike — and by all accounts they did.
I couldn’t find any numbers on this, but rich folks clearly started to accelerate income. This isn’t a tricky thing to understand: If they think their income-tax rate will climb in the coming year, people who are financially savvy will accelerate income into the current, lower-tax year.
For instance, if someone knew she was getting a $100,000 bonus in 2013 and didn’t want to pay the higher taxes, all she had to do was ask her employer to pay the bonus in early so it could be reported on her 2012 tax return.
There is nothing wrong with this. In fact, there is everything right. So that’s exactly what people and companies did.
How many people? Nobody really knows. But it’s safe to say that anyone with even a semiconscious tax adviser and financial planner was urged to make this move by Dec. 31, 2012.
People in Washington and in the media who wanted to raise awareness of the last crisis called it the “fiscal cliff.” That crisis was marketed so ingeniously that there was barely any question that people needed to take action before 2013 arrived.
This spring, Treasury suddenly noticed that tax revenues were coming in faster than expected. That’s also when the CBO came up with its projection of a much lower than expected deficit.
There could, of course, have been an increase in economic activity, with this additional business generating more in taxes. But it is now clear that economic growth in 2013 has been dismal. So that’s not where the extra tax revenue came from.
That gets us back to the more likely source: people who accelerated a lot of income into 2012 and paid their taxes by April 2013.
But think about it. All that extra tax paid on 2012 income means that less tax will be paid on 2013 income. So even if that $642 billion deficit projection by the CBO proves to be accurate, it’s also likely that the shortfall will increase when next year’s tax returns arrive, since there is no reason to accelerate income in 2013.
That’s the long way of saying that congressional Democrats and Republicans are deceiving themselves if they think the US economy can handle the stress of a total shutdown, or another squabble over ObamaCare, or a fight over raising the federal debt limit.