FACTS: Santa Goes to Washington

December 20, 2012

Two years ago we spoke with Kris Kringle, CEO of Santa Claus Incorporated. He told us how his business growth had been stifled due to government-created uncertainty and burdensome regulations. This year, he agreed to do a follow-up piece with us. We caught up with him in Washington, DC, where he told us his primary concern today is Washington’s fiscal cliff.

THE FISCAL CLIFF: SEQUESTER AND TAXES

The fiscal cliff is made up of two major policies: sequester spending cuts and expiring tax provisions.

What is sequestration? By definition, sequestration makes automatic spending reductions to get budget levels in line with spending goals set by law.1 For 2013, the sequester spending cuts are made by formula. Spending cuts by formula aren’t the best way to cut spending since formulas are unable to respond to changing circumstances and priorities.

In addition to these spending cuts, tax increases will take effect next year. Although many of the fiscal cliff tax provisions are commonly referred to as the “Bush tax cuts,” President Obama extended many of these provisions for two years in December 2010.2 These cuts affected:

  • Individual income tax rates
  • The death tax rate
  • The dividend and capital gain tax rates

THE FISCAL CLIFF AND THE ECONOMY

The nonpartisan Congressional Budget Office (CBO) estimated earlier this year that if nothing is done and the nation goes off the fiscal cliff, the unemployment rate would increase to over 9 percent by the end of 2013.3 The current unemployment rate is 7.7 percent.4 Ultimately, the CBO said the fiscal cliff would cause a recession. Already, stock markets have begun to respond to the threat of going off the fiscal cliff with investors unloading certain stocks as negotiations continue.5

ADDITIONAL COSTS AND REGULATIONS

According to a report released by the Mercatus Center earlier this year, regulations intended to increase the safety of American businesses and consumers instead often overwhelm businesses because of the number of rules with which they must comply.6 Additionally, when businesses are faced with a set of regulations that are unstable or easily changed, it can affect their choices for investment and hiring in the future.7 While regulations are often an effective way to set standards for businesses, uncertainty over how they will affect future costs and worry about unintended consequences often change the way businesses make decisions. This uncertainly is not unlike the kind businesses experience when Washington delays and dodges tax and spending decisions.

To view this document as a .pdf, click here.

  1. Congressional Research Service. Budget Sequesters: A Brief Review. March 8, 2004. P. 2. http://assets.opencrs.com/rpts/RS20398_20040308.pdf
  2.  CQ House Action Reports. 111-38. Subscription required.
  3.  The Hill. CBO lays out ‘fiscal cliff’ costs. November 8, 2012. http://thehill.com/blogs/on-the-money/budget/266931-cbo-lays-out-options-on-fiscal-cliff
  4. Bureau of Labor Statistics. Economic News Release: Employment Situation Summary. December 7, 2012. http://bls.gov/news.release/empsit.nr0.htm
  5. Reuters. Wall Street succumbs to Apple’s fall, ‘fiscal cliff’ uncertainty. December 14, 2012. http://www.reuters.com/article/2012/12/14/us-markets-stocks-idUSBRE8AP08020121214
  6. The Mercatus Center. Regulatory Overload. February 2012. Page 1. http://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdf
  7. The Mercatus Center. Regulatory Overload. February 2012. Page 3. http://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdf

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