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.