An Impartial Perspective on the Fiscal Cliff
I, like many people, have been inundated with conversations
about the looming “fiscal cliff”. It
seems to be an unavoidable topic.
However, like many things, it may be a popular topic and one that
provokes rigid opinions, but it seems that the facts often avoid us. I found myself getting frustrated with
congress and forming opinions, but I also realized how little I actually knew
about the situation. So, I began to research. Here is my understanding of the issue:
The Fiscal Cliff is a termed coined by Ben Bernanke,
Chairman of the Federal Reserve. It
refers to two separate things converging and potentially affecting our
economy. The fist is the expiration of
the Bush Tax Cuts and the second is the effects of the Budget Control Act of
2011. The Bush Tax Cuts which lowered
marginal rates, lightened estate tax, lowered capital gains tax amongst other
things are set to expire at the end of the year. If they do, we will revert to our old tax
policy which will end up costing middle class families about $2,000 (4%
increase) more per year and top earners about $120,000 (7% increase) more per
year. This tax burden increase in itself
is bad for economic conditions but when combined with the other aspect of the
Fiscal Cliff it could create a significant problem.
The Budget Control Act of 2011 was created in 2011 due to
the debt ceiling crisis. Spending far
outpaced Congress’s expectations and they had to scramble to get approval for
an increase in the “debt ceiling”, which is basically the allowable deficit. Congress granted a $900 Billion increase to
our debt ceiling in exchange for some immediate spending cuts, but also, and
more importantly, 1.2 trillion in future spending cuts over 10 years. These $1.2 Trillion in future cuts is where
it gets tricky. The act created a
deficit reduction committee that was supposed to come up with these cuts; the
problem is that they did not do it. The
Bill states that if the committee failed to come up with a deal then
“Sequestrations” or indiscriminate cuts to all specified government programs
would take place. The ultimate fear is
that Congress will fail to approve the necessary cuts to avoid the dreaded
“Sequestrations” and the Bush Tax Cuts will expire resulting in simultaneous
tax increase and decreased government spending.
According to most experts, going off the fiscal cliff will
likely result in another recession.
However, if we continue our current path government debt will get out of
control. Republicans want lower taxes
and cuts to entitlement programs such as Medicare, Medicaid and Social
Security. Democrats are adamant that the
rich should pay higher taxes. There are
only two ways to balance a budget, by adding to inflows or by cutting
outflows. If you take a look at the US spending,
of the total 3.8 Trillion that has been and will be spent in 2012 12% is
welfare, 22% is Healthcare, 24% is Social Security and 24% is defense, so 82%
of our budget is for entitlements and defense.
Democrats want higher taxes on the “Wealthiest Americans”, those making
$250,000/years or more. Their latest
proposal would end the Bush era tax breaks for those “wealthy” Americans; this
would generate about $1 Trillion in new revenue in 10 years. However, can we tax our way out of government
budget issues? The facts suggest that we
cannot. A $1 Trillion revenue increase
over 10 years is hardly going to offset $16 Trillion in debt with entitlement
programs that have increased at rapid rates.
Over the last 40 years entitlement programs such as Medicare, Medicaid
and Social Security have went from approximately 3% of GDP to 8% of GDP. The answer is likely a combination of cuts
and tax increases. According to Paul
Ryan, former VP candidate, if you taxed all the millionaires in the country at
100% it would only run the government for 4 months. On the other side, Billionaire Warren Buffet
claims that he pays a lower tax rate than his secretary and often suggests the
unfairness of current tax law, specifically capital gains tax. While the solution is clearly very difficult,
the truth seems to be that spending on entitlements and/or defense needs to be
seriously adjusted in order to have a chance.
While taxing “the wealthy” may make people feel better, it is not the
answer-but it could be part of the answer.
Other options include alternative forms of taxation. While taxing people on income will seemingly
put the brakes on economic growth, other forms of taxation may not. Consumption taxes are believed by some
economists to have a lighter effect on the overall economy. It is possible that consumption tax could
yield the necessary revenue without the damaging economic effects. A more intriguing and controversial method
would be to tax carbon emissions. Carbon
emissions which are currently considered a major factor in global warming,
could be taxed at a light rate and conceivably stimulate economic growth in
certain areas. If you tax energy that
comes from polluting methods such as burning coal, you open the door for
alternatives. Solar, wind and nuclear
would potentially turn the corner and become increasingly viable. Increased practicality would lead to increase
investment. Increased investment would
lead to increased exploration and production.
Increased exploration and production would lead to increased jobs. Additionally, increased exploration would
lead to increased efficiency.
Eventually, these forms of energy would become cheap. This would not come without a price. The price would likely be increased utility
costs in the short term. The question is,
would the jobs that come with increased investment offset the economic impact
of higher priced utilities. Several renowned
economists and businessmen support carbon tax such as Duke Energy CEO, Paul
Anderson, the CEO of Caterpillar, James Owens, Nobel Prize winning economist,
Gary Becker and John McCain’s campaign advisor, Kevin Hassett. Arthur Laffer, the “Father of Supply Side
Economics” put it this way, “We need to tax the things we want less of (such as
carbon dioxide) and reduce taxes on things that we want more of (income and
jobs)” (www.carbontax.org). It seems unlikely that an unorthodox tax
will be used to resolve an issue that needs to be solved within thirty days,
but it is something that needs to be considered. Awareness is the first step!
Most recently John Boehner responded to the Tim Geithner’s
proposal with his own proposal which included no tax increases, even for the
highest earners. Above all else, it
seems that Democrats are unwilling to budge on their belief in tax increases
for the rich. It has been clearly stated
by the President, the Vice President and the Treasury Secretary, Tim Geithner
that the highest earners need to pay more.
Considering this fundamental difference and the very limited time, it is
difficult to be optimistic about a resolution to our “Fiscal Cliff”. Even though, tax increases for the rich will
not solve our problem, it has become a major point of this negotiation. It is an emotional issue rather than a
factual issue. Both sides are rigid and
seem narrow in their discussion.
Compromise is a difficult thing, particularly when you were seemingly
elected into office to do anything but compromise. However, if one thing is clear it is time to
do what is right for our country. Partisan
politics and unbending loyalty to your constituents has failed us. This issue is so difficult, but if I have
could express any desire it would be to consider everything and negotiate when
it is necessary to negotiate.
Bob Caperton, Jr.
Sources:
www.acg.org
