Dealing With the Fiscal Cliff Instead of Talking About It

Right From the Start

The Washington Post Writers Group’s Robert Samuelson recently published a column detailing a fiscal strategy for avoiding the so-called fiscal cliff facing the government should it fail to find a substitute for the automatic tax increases and sequestration (mostly for defense spending). Samuelson is generally considered non-partisan (he refuses to vote in elections believing that to do so compromises his impartiality) although that is difficult when working for the highly partisan left-wing Washington Post.

Mr. Samuelson’s column suggests the following steps to avoid the fiscal cliff:

  1. Repeal the existing mandatory tax increases and spending cuts and substitute a package that reduces the deficit from seven percent of Gross Domestic Product (GDP) to two percent.
  2. Accept President Obama’s demand for a tax rate increase for the wealthiest in the form of a one-year surtax that will expire concurrently with implementation of major tax overhaul that will permanently reduce the rate for corporations and the wealthy to thirty percent – down from the current thirty-percent.
  3. Increase the tax rates on dividends and capital gains to offset the reductions in corporate and capital gains rates applicable only to those earning $200,000 or more.
  4. Increase the debt ceiling by another $2 Trillion – up from its current $16.4 Trillion to $18.4 Trillion.
  5. Mr. Obama will endorse substantial cuts to Social Security and Medicare and agree to work for their passage in the Congress. He suggests that eligibility age must increase and benefits for the wealthiest must be reduced.
  6. Create two task forces. One to study an energy tax and another to study controlling healthcare costs.

Mr. Samuelson may be non-partisan but he has drunk the Potomac Kool-Aid and asked for seconds. This is simply another way to kick the can down the road while embracing the appearance of bi-partisanship. It’s yet another way to allow the President and the Congress to look accomplished and statesmanlike without actually accomplishing anything. For that reason alone, the “fiscal cliff” solution will probably look much like what Mr. Samuelson proposes.

But it just compounds the problem by delaying the solution. It is the equivalent of banks continuing to increase loans to a failing business in order to avoid the recognition of a loss on their own books. Inevitably the business fails and the loss to the bank is greater than if it had acted promptly.

Forty years ago, one of the first lessons in Contract Law was that an agreement to agree is neither binding nor enforceable. (I say forty years ago because I have no idea what is taught in law schools today and I am suspicious that more time is spent on “social justice” than actual justice.) Unfortunately, that is what Mr. Samuelson’s proposal is – an agreement to agree.

  1. Repealing the current tax increases and spending cuts in favor or an agreement to reduce the deficit to two percent without a binding method of achieving it is simply an agreement to agree. Congress had demonstrated time and time again that “target legislation” is never accomplished – think of the number of times that Congress has used reductions in Medicare to balance some spending increase only to re-authorize the Medicare spending down the road.
  2. A one-year tax surcharge on the rich simply delays the same fight about taxation and spending that is currently pending. It isn’t as if this is a problem that has arisen recently. It is the same debate that has been occurring since midway through President George W. Bush’s second term. Additional study and negotiations will simply leave the parties exactly where they are today – except that all of the money raised by the surcharge will have been spent on everything but deficit reductions and the baseline for recurring expenditures will have risen again.
  3. Increasing the tax rates on the rich for a second time by increasing the tax on dividends and capital gains for them alone without the concurrent and substantial reductions in entitlement spending simply gives the government more money to spend, more money to waste, and a deeper hole from which to crawl out.
  4. Increasing the debt ceiling yet again is throwing good money after bad. Adding $2 Trillion to the national debt will take about fifteen months at current spending levels. The national debt is already so high that should interest rates increase – a strong likelihood given the inflationary policies of the Federal Reserve System through monetizing the debt – nothing can be done to keep the economy and the country from going over the cliff.
  5. Agreeing to work towards substantial cuts in Social Security and Medicare is the penultimate agreement to agree. It is just sound and fury signifying nothing. If this were a real proposal, the reductions in entitlement spending (including Medicaid and Obamacare also) should be the trigger for all of the tax increases discussed above. Absent that we will wind up with the tax increases and no entitlement reform. Again, this problem is not new. The solutions are all known. It just requires the courage to implement them.
  6. And finally, implementing two new “study commissions” is just plain stupid. There are only two reasons for a “study commission” on energy – one is to use tax policy to force uneconomic choices on energy consumption (read wind, solar and biomass) on a marketplace where there is already abundant coal, oil and natural gas complete with the knowledge and infrastructure to produce, distribute and use them; or two to increase tax revenue for even more wasteful spending and increasing the baseline from which future spending increases are to be expected. And a study on controlling healthcare costs in just another way of imposing government controls on what should be a competitive marketplace. There is not a single instance in which government regulation has been demonstrated to result in greater efficiency than the competitive marketplace. Take it from someone who worked for twenty years in a government regulated industry, such businesses manage to government edicts rather than customer expectations. If you want to reduce healthcare costs remove the barriers to robust competition in the healthcare industry.

Throwing cold water on the suggestions of others is hardly the way to advance solutions. The Democrats and Republicans seem to have a lock on that process. Mr. Samuelson’s proposals would actually work if they were implemented programs rather than discussion points. So let’s try to put some meat on Mr. Samuelson’s bones.

  1. Repeal the current fiscal cliff tax increases and spending cuts conditioned on implementation of the following remaining items.
  2. Implement a tax surcharge on the very wealthy for the sole purpose of reducing the national debt. The national debt would have to be capped at current levels and reduced by applying such tax revenues until the debt reached no more than fifty percent of Gross Domestic Product (slightly above the average since the conclusion of World War II). Each year the debt ceiling would be reduced to reach the fifty- percent target. At the point the GDP reaches the fifty- percent mark the surcharge would be eliminated.
  3. Increase the tax on dividends and capital gains for those earning in excess of $250,000 to sixty percent of the income tax paid by those individuals conditioned upon implementation of spending cuts at a ratio of four to one. (Since Congress, like most states utilizes the “current service level” budgeting process which treats reductions in the rate of spending increases as if they were cuts, the spending reductions mandated here can be achieved by simply freezing spending at the current level and requiring efficiencies and/or program eliminations to meet the overall budget restrictions. A hiring freeze coupled with elimination of current budgeted but unfilled positions would go a long way toward meeting that goal.
  4. Increasing the debt ceiling is unnecessary. Maintaining the current debt ceiling subject to the annual reductions described above, would force the immediate budget reductions necessary to resolve the fiscal crises.
  5. Instead of “working toward” substantial decreases in Social Security and Medicare, immediate action is required. For those fifty-five and under, the eligibility age for both Social Security and Medicare should be increased by two years and then the eligibility age should be pegged to increases in actuarial tables for life expectancy on a going forward basis. Social Security benefits should be phased down for those earning in excess of $250,000 per year but should be offset by a tax credit in an equal amount for taxes incurred from payments from pension plans, IRAs or other retirement plans. Medicaid as well as all other welfare payments should be tied to a strict “workfare” program under which capable adults are required to work as a condition of receiving payments – the work can be public service work which would reduce costs to state and local governments by substituting “workfare” employees for public employees.
  6. Implement one study commission to exam the barriers to competition in the healthcare industry and propose legislation to eliminate those barriers.

Many of these proposals appear to be draconian but for anyone who has run a business which appears to be head for bankruptcy, draconian changes are standard. The point is that in the long run it is better for some to suffer for a short period, than for everyone to be penalized in the long run.

If Mr. Obama and the Congress are unwilling to make the hard choices today, then I would suggest that we let the bus go over the fiscal cliff now when the damage is less than it will be a year from now, or two years from now.

A democracy only guarantees opportunity. It never guarantees success.

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Posted by at 05:00 | Posted in Economy, Federal Budget, Federal Government, President Obama, Taxes | 27 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Rupert in Springfield

    Obama is going to get his tax increase on the rich. Likely this will be in exchange for making the Bush tax cuts permanent however I wouldn’t count on that one.

    The left will be overjoyed by the tax increase. Obama will be championed for a while over his masterful play.

    Then after a bit everyone will figure it out – “oh yeah, I guess increasing taxes on the rich doesn’t get me a job and doesn’t really do much about the deficit either”.

    The bad part is we will have wasted more time rather than get our economy going. The good part is maybe the haters and the envious will shut up for a while so actual problems can be addressed.

    • DavidAppell

      When exactly did conservatives start worrying about US debt? It wasn’t when Reagan increased it by 150%, or when Bush 2 doubled it….

      • guest

        Of curse, Obama, Kenya believe, is even worse than the aforementioned. Right?

        • DavidAppell

          Still angry about election results, huh?

  • Bob Clark

    If the corporate rate is cut from a marginal rate of 35% (I think this is the current nameplate marginal rate) down to 25% as suggested by some in the administration, then increasing the personal dividend and capital gains rates back to 20% from the current 15% rate is justifiable (as corporations retain more of their profits offset by a not surprising increase in dividend and capital gain rates). Since Obama won the election and the Dems won a few extra seats in the Senate, I think we have to compromise and allow the marginal rate for high end income earners to increase at least a modicum (give Obama his bone).

    I’d like to see medicaid, welfare and food stamps reformed such that government at all levels reduces its role by allowing giving to certified charities working with the poor (needing and wanting support) to be fully deductible against taxes. Government would reduce its own expenditure in concert with the reduction in its charitable tax revenue deduction. The other thing is to freeze or roll back environmental regulations until economic growth recovers to its potential for a year or more. We need to shift focus to being producers rather than entitlement takers. (It’s the only sustainable way to go. Greece and France economic models should not be emulated but avoided.)

    I still think austerity is not the way to go, though. I would advocate a middle ground where federal spending is frozen nominally and indefinitely until the economy pulls federal tax revenues close to balance with federal spending (with the modifications noted above). Thus the need to encourage increased production and charities working with the poor to put them on a path of independence.

  • conservatively speaking

    Mitigating left wing socialists “gift of grab” obviously past due. The fiscal cliff might only bode a street curb, essay, essay…taxpayers only bonded in a precinct able way. ‘Buy’ the way, Kurt Schrader…politicalcorrection.org/blog/201110040015

  • Oregon Engineer

    ROn Paul had the right Idea. Take the Federal budget back to 2004 and freeze it. A time when Granny was not being thrown into the street, Children were not starving to death in the schools and women could get an abbortion on demand and birth control on demand (may have to pay for them). Current tax revenues are slightly more than the budget was then. Instant balanced budget. And no links. if you want to verify this for yourself, do the work.

    • valley person

      There are a lot more grannies now, and the cost of their food and medicine is not at 2004 levels.

      If all we want is a balanced budget, then a good place to start is to go all the way over teh cliff. It would cut the deficit in half next year.

      • Oregon Engineer

        And I have nothing against it. At least it is a step in the right direction. An agreement reached by both parties, passed by both houses and signed by the president. Lets Go.

    • DavidAppell

      False on revenues. In 2Q2012 federal revenues were 17.1% of GDP, but in 4Q2004 federal spending was 20.1% of GDP. That’s a gap, today, of about $475 B/yr.

  • DavidAppell

    The absolute first thing we need to do is get rid of this obscene 15% tax rate on capital gains. It’s nothing but a huge subsidy to the rich, and it spits in the face of every working man and woman. They know it, and it’s one reason Romney lost.

    Then we can remove the ridiculous loophole that lets hedge fund managers declare their income as interest. It’s simply income — I know it, you know it, and they know it. It’s an insult, squared.

    You wonder why people don’t believe in (crony) capitalism? These are some of the very first reasons.

    • guest

      If he’s a demigods gift to what’s left, wha’ts your slake on George Soros, monsieur DA?

      • DavidAppell

        I barely know anything about George Soros, except that he has a lot of money and spends some of it on his interests and causes, like many other people. Why?

        • guest

          Generous patron $aint to MoveOn.org, etc.. etc. en.wikipedia.org/wiki/George_Soros “`controversially, a secular mega billionaire templar pharisee money changer…obscene as a New World Order emissary of Satanic consortia token as resembling Hjalmar Schact.

          You can judge for yourself, IMO, Glenn Beck. et al, have made the right call.

          • DavidAppell

            And? There are lots of generous patrons to conservative causes, too. If you don’t understand that, you’re a fool.

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