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Brave New Start to the Year

January 11, 2013

Well that was fun. Negotiations went to the brink, we had politicians dropping the "F" bomb a few steps from the Oval Office, the Senate described as "sleep deprived octogenarians" by a congressman and an all around feeling that it was better than nothing.
-Christian W. Thwaites, president and CEO, Sentinel

A few points starting first with the obvious danger that three big issues are postponed a few months into a Part 2. These are i) the sequestration on spending cuts, mostly defense ii) the debt ceiling and iii) continuing resolution to keep the government funded. So everything so far is prelude for another round of acrimony. Second, the restoration of the payroll tax from 4.2% to 6.2% is perhaps the most regressive tax hike imaginable. Everyone pays it, except for some municipalities that have Social Security opt outs, yet only up to $113,000. This clips around $115bn from wages and salaries of $6.8tr so around 1.7%. This will hit after-tax income hard especially as compensation growth is barely 2.0% anyway. The net effect is a big fat zero for ordinary workers in 2013. Third, the drag on the economy is about the same as we've had for the last few years. Remember, despite headlines about out-of-control spending, the government component of GDP has slowed growth by about 0.8% for the last two years and the deficit had decreased 22% in dollar terms and from around 10% to 7% as percent of GDP. The reason the deficit has improved so quickly is because of the rise in income tax receipts, which requires either new jobs or higher pay and is far and away the quickest way to reduce deficits. Personal current tax receipts are 26% above their 2009 lows and still very low by historic standards. Here they are as a percent of GDP over the last 10 years:

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