With the election behind us, attention has turned to avoiding the so-called fiscal cliff. Unless Congress and the President reach an agreement, various tax cuts will expire and automatic spending cuts will ensue. These include the 2% temporary payroll tax deduction, the end of the tax cuts passed in the Bush era, and a variety of business incentives. Obama wants a solution based on tax hikes for high income earners, why John Boehner is talking tough about spending cuts and maintaining current rates. There are two major problems here, and neither is the possibility that Obama and Congress can’t reach a deal.
First, sequestration was a bad idea. It simply deferred the last round of tough fiscal decisions until after the election. Our financial situation is dire because politicians have refused to consider long term effects and unintended consequences of policies. They’ve kicked the can down the road and Americans have rewarded them with reelection. According to Bob Woodward, the sequestration was Obama’s idea, but some of the blame extends to the Republicans in Congress for accepting the idea. No Congress should ever vote on income tax rates that expire on a given date. Representatives should have the courage to change the rates and let future Congresses revisit them if they wish, but not under the threat of expiring tax cuts.
Second, the REAL fiscal cliff is the coming crisis brewing from the $16 trillion and rising in national debt. Those fretting about the end-of-year fiscal cliff act as if some kind of deal will fix our long term budget problems. They act as if making a deal means that Washington is averting the crisis. This is simply not true.
It was just reported that President Obama is seeking $1.6 trillion in new revenues over the next decade, twice what was discussed in the summer of 2011. This constitutes $160 billion per year when deficits in excess of $1 trillion are forecast for the coming four years. Of course, tax hikes on job creators always create a drag on the economy and any 10-year deal is meaningless because its terms will be revisited after the next elections anyway. These realities aside, avoiding the current fiscal cliff does nothing to address the real problem.
The bottom line is simple:
1. Washington spends too much and serious cuts must be made. Some will be unpopular, but Congress has that responsibility. The federal government is involved in areas well outside of its Constitutional boundaries.
2. The tax system needs to be simplified and flattened. Punitive taxation of successful Americans balanced with redistribution schemes like EITC for low wage earners creates perverse incentives for Americans to be less productive. Washington needs to get out of the social engineering business and allow Americans and businesses to make their own decisions free from federal intervention.
Given the fact that Obama vigorously opposes both #1 and #2, it is highly unlikely that any deal to avoid the “cliff” will be much better than going over it. My fear is that Boehner will give in, taxes will be raised, and many Americans will actually believe that our fiscal situation has improved.
My advice to the Congressional Republicans is simple: Put a bold plan on the table that addresses #1 and #2 and insist that Obama negotiates within that framework. Addressing these issues can create jobs and ultimately raise revenues, and eliminating a wide range of tax deductions (something important to Obama) can be part of the deal. If talks stall, let the next Congress take up the issue in January. It’s time that Republicans take a stand. The real fiscal cliff is not too far around the corner and we must take serious measures to address the real problem.
This is so frustrating. The house is burning down and Obama wants to throw gas on it. John Boehner wants to sprinkle a little water on it but the fire will rage on anyway. Boehner needs to be replaced.
Agree. Obama is taking the lead on the negotiations. Boehner doesn’t understand what’s going on and what the real issues are
Disagree Parnell. Spending is a problem but solving the problem must include higher taxes. We need to be realistic. Holding the line on some spending while asking the wealthy to pay a little more is the only rational solution especially in this fragile recovery.
A letter to the President on the fiscal cliff:
Dear Mr. President
Like the person from Tennessee you mentioned in your press conference, I did not vote for you. Perhaps you will understand why as you read this letter. My concerns are more than financial but I will deal only with fiscal matters here. I am retired and my nest egg is largely invested in equities so I’m sure you know my fiscal cliff had already begun with the second term selloff. I cannot go out and find another job as I am a spousal care giver. But that’s OK with me since I put in 50 years in the work force. I paid into social security and Medicare at the maximum amount for each of those years. In the last two years you reduced contributions to those funds over $200 billion. And with Obamacare you are cutting Medicare by $716 billion over 10 years. And you plan to cut payroll taxes again and call it a middle class tax cut.
But oddly enough these are not my main concerns. I spent my career in accounting and finance so I am used to people playing fast and loose with numbers, arranging the facts to suit the occasion if you will. The increased taxes on the wealthy would produce $87 billion per year. It is estimated to cost 700,000 jobs. This will result in no taxes from them plus increased unemployment benefits. So the net effect will be let’s say $50 billion. We have a trillion dollar deficit. This is like switching to the low price spread to save the family budget.
In 1970, means-tested entitlements were $10 billion per year. Now that number is $570 billion. Back then 20% of filers paid no income tax. That number is now 47%. Even with your low scores on the math section, you should be able to understand that this is not a recipe for fiscal prosperity.It’s time to stop campaigning and blaming the Republicans. What you are proposing is nothing short of a Grecian formula. That wonderful socialist republic has 25% unemployment and a 7% decline in the GDP. Europe, our biggest customer, is looking bad, even Germany, now that the entitlement culture has caught up with them. We are a Greek tragedy in the making. The difference is that Greece can’t print its own money.
This isn’t about politics anymore. It is not about a mandate or your legacy. It is about survival. You won because so many voters depend on the government. You had a lousy economy but it didn’t matter. But on that subject it will get worse. The nervousness in the stock market is not uncertainty. It is anxiety. They aren’t hiring, selling or exporting. This may come as a surprise but big business doesn’t postpone hiring because of uncertainty but because of bad outlooks. Small business is bracing for the mpact of Obamacare. This is a ripe situation for a recession that could be tipped off by what you are proposing.
But never mind the economy. The people have spoken and they said no to growth and prosperity, preferring entitlements. But these benefits must come with real sacrifice, not the showy tax increases you are proposing. You are short about $950 billion per annum. We need cuts, other taxes or both. Here’s an idea. Let the Bush tax cuts expire. That would produce a big chunk of revenue. We retirees would breathe easier. The middle class would take a hit but after all they did allright with these taxes under Clinton. And it might get some of the 47%,
which surely would make them feel like they are contributing. If the economy tubes, you could blame the Republicans and they could blame you. So business as usual. On the expense side, sequestration and other cuts would occur and you could use your impressive oratory skills to claim victory for the American people and avoid getting hammered in the 2014 midterms.
Frankly I expect you’ve stopped reading by now. If not, please give us something else besides the nickel and dime taxes on the wealthy. Find the taxes and cuts somewhere. Get Sasha and Meliea to help you with the math. Elections have consequences. You got reelected, now it’s time for Truth or Consequences.
I saw today at the WSJ a chart that presents the average federal tax increase for different incomes if we don’t avoid the fiscal cliff. For $200,000-$500,000 income the increase is $11,887. What is that, one visit less at Tiffany? For $500,000-$1 million the increase is $38,602 – what is that, about 3 visit less in Tiffany? lol.
I don’t fear the cliff. We need a wakeup call.
Aliza: The fiscal cliff is not a cliff. It is only the tip of the iceberg. We can’t tax top earners enough to get close to balancing the budget. You can lol about Tiffany’s but they earned it, you didn’t. When I was little they taught me that taking something I didn’t earn is stealing. When we finally face this crisis it will be your taxes that go up. Don’t worry, it only means fewer visits to Wal Mart.