It appears both sides are quite close to a deal that would avert (or at least quickly reverse) the fiscal cliff. Although negotiations remain ongoing and not all the information is public, here is what we know -- or think we know -- would be included in the deal as it has been negotiated so far:
- A permanent extension of most of the 2001/2003/2010 income tax cuts for incomes below $400,000/$450,000 include lower rates on ordinary income, capitals gains, and dividends.
- A top ordinary rate of 39.6% on ordinary income above $400,000/$450,000 and 20% on capitals gains and dividends for those earning above those thresholds.
- The reinstatement of the PEP and Pease provisions to limit exemptions and deductions for income above $250,000/$300,000.
- A five-year extension of various refundable tax credits established in 2009 and extended in 2010, including the American Opportunity Tax Credit (AOTC) as well as expansions to the Child Tax Credit and Earned Income Tax Credit.
- An extension of current policy on the estate tax (include a $5+ million exemption indexed for inflation) but with a rate of 40% instead of 35%
- A permanent patch to the Alternative Minimum Tax
- An extension of various "tax extenders" for 2012 and 2013
- A one-year extension of 50% Bonus Depreciation
- A one-year "Doc Fix" to prevent a 27% cut in physician payments
- A 2-month delay of sequestration
- Still unspecified spending cuts to finance the cost of the doc fix and sequester delay
- A one -year extension of unemployment benefits
- A one-year extension of the farm bill
Although no costs have yet been reported, we have made some very rough estimates based on our understanding of the deal. Note that numbers could be off somewhat from estimating differences and could be off substantially if any agreed-to policy are different from how we understand them currently.
Relative to current law, we estimate this plan by itself would increase the deficit by roughly $4.6 trillion including interest. Relative to current policy, we estimate it would reduce the deficit by $550 to $600 billion.
How this plan effects the debt depends on what happens in future stages. Assuming policymakers continue current policy -- including by errantly delaying the sequester and avoiding SGR reductions in physician payments without offsets -- we estimate the plan would result in debt levels of between 79 percent of GDP (CRFB realistic, which assumes war drawdown and no extenders) and 86 percent of GDP (CBO AFS, which assumes no war drawdown and continued tax extenders).
Importantly, though, the plan would leave in place both the sequestration and the SGR -- which could serve to encourage further deficit reduction. If policymakers were able to identify the roughly $1.2 trillion in offsets necessary to pay for those measure (while also paying for or letting expire "tax extenders" and drawing down war spending) then the debt could fall to as low as 73 percent of GDP.
Even this might be insufficient to stabilize the debt, and would require substantial new revenue or spending cuts to be identified. Presuming our numbers are right, such a plan would likely represent the absolute minimum amount of savings which could have the potential to stabilize the debt.
For that reason, whatever happens to this package in 2012, more work will be necessary in 2013.