Nov 13 2012

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The “Fiscal Cliff” and the Nation

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Not If But When…

We are mortal, and therefore imperfect.

Nowhere is this better exemplified than in Washington, DC.

In 2011, when faced with political gridlock over taxes, spending and the debt limit which threatened to unravel the nation’s credit rating and tank the economy, Washington did the best it could under the circumstances.

It kicked the can down the road.

There would be mandatory spending cuts (the “sequester”) in return for an increase in the debt ceiling, designed to avoid the possibility of a sovereign default. This was contained in the Budget Control Act.

While the debt ceiling increase was immediate, the painful spending cuts were delayed until 2013, in theory allowing the American people to intervene directly through a national election, break the Washington stalemate, and provide decisive direction to our elected representatives on the preferred national fiscal path forward.

At least that was the plan.

However, voters, it seems, are imperfect too.

Americans, fed up with the partisanship and gridlock of Washington that enabled a public spectacle in 2011, decided, in their infinite wisdom, to send back to Washington the exact same players that had been the source of their ire to begin with.

The President is back.

A billion dollars worth of concocted Jedi mind tricks on Bain, birth control, binders and Big Bird returned a diminished, agenda-less, but unbowed POTUS to office, the first president in 180 years to win fewer votes in re-election than in his first victory. Indeed, even more galling for progressive partisans, their Democratic icon received fewer votes in re-election than the “reviled source of all evil,” George W. Bush.

Harry Reid and the Democrats are still in charge in the Senate, having surprisingly picked up two seats in an election cycle that was supposed to turn over control to the GOP. But the gain had far more to do with the truly moronic choices of Republican primary voters in Indiana and Missouri than with a positive reflection of the Democratic agenda, and as a practical matter, with 55 votes, Reid is still five short of a filibuster-proof majority that would provide operational control of the Chamber.

Again, Reid can do nothing without the approval of Senate Minority Leader Mitch McConnell.

In the House, John Boehner will be back as Speaker.

Republicans started out this election season down 11 seats due to redistricting. Though there are still some races to be called, Boehner will clearly retain his majority, the only question being how many seats may have been lost. The guessing now is about 7 seats. Thus, having won 54 percent support in the “People’s House,” Boehner and Republicans have no less reason today than in 2011 to believe that they are pursuing the priorities of the American people.

Now, the players return to DC today, not simply to revisit their handiwork from 2011 – which was always intended to be more placeeholder than plan – but also to confront the sour fruits of fiscal procrastination from the past four years. Lawmakers and the President face not only the mandatory spending cuts of the sequester – which will have a disproportionate impact on defense – but also the expiration of a large list of ad hoc tax cuts and fiscal “patches” that will impact the take-home pay of every American.

Specifically, if Congress does not take action by December 31st, Americans at all levels will see a startling and significant increase in their taxes. At the end of 2012, all the Bush tax cuts at every level will expire, as will the two percent FICA payroll tax holiday. Unless Congress extends an expired “patch” for the Alternate Minimum Tax (AMT) , 26 million Americans will have to pay, on average, an extra $3,700 tacked on to their 2012 tax bill. Estate taxes will go up and new Obamacare taxes will hit those earning $200,000 or more.

For businesses, a series of “tax extenders” that have offered targeted support to stimulate the economy, by, for instance, allowing write offs for capital investment, will expire at the end of the year.

And for good measure, health care will take an unpredictable hit. Unless Congress takes action before the end of the year, doctors who accept Medicare will face a 27 percent cut in their reimbursements effective January 1. That could lead to a wholesale exit of medical professionals currently serving Medicare patients with ensuing chaos.

The debate on what to do about the sequester and these expiring tax provisions is informed by America’s precarious fiscal condition.

CBO finished its year end summary for the US fiscal year, which ended on September 30th. For the fourth year in a row, the US logged a trillion dollar plus deficit, adding a cool $5 trillion to the national debt in just over 200 weeks.

Worse, without any concerted action on the debt during the past year, and with a divided vote keeping the same parties in charge in Washington, the Treasury has nearly used up the incased borrowing authority enabled by the Budget Control Act. The debt ceiling will need to be raised again by February at the lastest, yet with the same parties at the table, there has been no meaningful change on how to cope with America’s debt problem, potentially leading to another, high stakes fiscal showdown.

But what is perhaps most disheartening about all these consequential issues coming to a head simultaneously is how vacuous the political arguments are, particularly among the Democrats.

President Obama ran on an election platform that emphasized the repeal of the Bush tax cuts for those earning more than $200,000. After the election, POTUS went further, saying that he will veto any bill that maintains those cuts, making repeal of these specific cuts the centerpiece of any budget deal.

The problem with this is that the President’s posture is largely symbolic, economically contradictory and beside the point.

Symbolic as the Joint Tax Committee estimates that raising taxes on those earning more than $200,000 would at best collect $82 billion in extra revenue per year. That is based on a static formula that does not take into account either personal behavior (where people will seek to shelter capital elsewhere) or lower economic growth as a result of the increase, which would generate less profit and government revenue in the financial waterfall.

Contradictory because the Bush tax cuts, as part of the current tax code, are raising revenue. That’s right, raising revenue.

According to Treasury, OMB and CBO, tax collections for 2012 were $2.4 trillion. That is up 6.4 percent overall for the year. Indeed, individual tax payments are up $233 billion in the last two years, or 26 percent. Tax receipts for 2012 were, in fact,, very close to the historic high of $2.5 trillion that the government received in 2007 – a year when the deficit was a measly $161 billion.

The difference is not revenues but expenditures.

Outlays in 2007 were $2.7 trillion. But federal spending jumped in 2009 to $3.5 trillion, and that has remained virtually constant since President Obama took office effectively creating a new baseline of federal spending, incurring enormous deficits that require massive borrowing.

And finally, the President’s position is beside the point because an under-taxed economy is not the long term problem; entitlements – Social Security, Medicare and Medicaid – are. These programs are the major drivers of budget insolvency, as anyone who has looked at the budget numbers – including any number of commissions – will tell you. Indeed, you could tax the rich at 100 percent and cut discretionary spending into extinction and it will not solve the long term budget math.

But the President and his supporters appear wedded to a position that will not countenance any change in entitlements – no means-testing for wealthier Americans; no change in the eligibility age to better reflect current mortality rates; no change in automatic cost of living increases in annual benefits that may overstate the impact of inflation.

In addition, it goes without saying that the unchecked growth in these programs does not factor in the additionl budget challenges of Obamacare, which is already hemorrhaging from the artificial cost containment estimates made available at its passage.

During the campaign, President Obama attacked Governor Romney time and again, saying that the GOP nominee’s math didn’t add up. Today, it is the President’s math skills that are sorely lacking. Is a “fair share” social justice argument more important than ensuring economic growth and budget discipline?

We are mortal and therefore imperfect.

But the budget numbers coming at us are clear and certain.

Either we choose to see them and cope, or ignore them and become Greece.

We are imperfect, but the decision is ours.


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