Plunge off fiscal cliff may turn into a bungee jump

fiscal cliffWith just hours to go before the countdown clock expires on the nation’s perch atop the fiscal cliff, we still have nothing but danger signs ahead.

If action is not taken by the legislative and executive branches in the next two days, taxes will increase by a total of about $800 billion in 2013, and government spending will be cut by only $100 billion. According to the Tax Policy Center, the average middle-income family’s tax increase will be about $2,000, while top income tax rates will rise to 39.6 percent. The top rate on dividends will be taxed at 39.6 percent instead of 15 percent. Capital gains taxes will increase to 20 percent from 15 percent, and higher income-earners will pay a 3.8 percent investment income surtax. The 35 percent tax on an individual’s estate value will jump to 55 percent.

Increased borrowing will cause the U.S. debt limit to be violated again, and very soon. And, without action, it is likely that the United States will enter another recession in 2013. Why? Spending cuts hurt economic activity, and tax hikes hit businesses and individuals, negatively affecting disposable income, business investment and hiring.

Who’s at fault if the nation tumbles over the fiscal cliff and crashes?

The true answer is that we’re seeing a partisan blame-game leading up to the fiscal abyss. If agreement is not reached by Monday, Obama will use his bully pulpit to say that Republicans are to blame because they insisted on spending cuts that will hurt economic growth. Republicans will blame Obama and the Democrat-controlled Senate because they insisted on gigantic tax hikes and few spending cuts.

Politicians have backed themselves against the wall, because big tax increases, government spending and government debt have thrust the nation into a no-growth or turtle-paced growth mode. Historically, fiscal spending crises could be overcome if the economy generated strong growth. But economies can’t grow much when both taxes and government entitlement spending remain high. What’s new in our current dilemma is that, this time, we cannot grow our way out of this quandary–too much government spending and too much borrowing has put a cap on growth.

The federal government’s mouthpieces are promising to cut future spending on entitlement programs. We’ve heard that before, and somehow the cuts never materialize. I don’t believe proposed spending cuts by federal officials are real. In fact, what’s really dangerous is that nobody in Washington, including the Republicans, are discussing cutting the total, actual amount of spending. What they’re discussing is reducing the rate of increase in spending. Under the current plan, taxes will increase $5 trillion over the next 10 years to pay for increased spending and a small debt reduction.

Even if Obama, who has increased the U.S. public debt by 83 percent in the last four years, succeeds in his full rate hike on “rich” people, it would have only reduced the government’s 2012 deficit from $1.10 trillion to $1.02 trillion. That tells me Obama’s negotiation objective is political, not economic. This is partisan, zero-sum political behavior designed to undermine the Republican majority in the U.S. House.

But what could happen is that a plunge over the fiscal cliff at midnight Monday could turn into a bungee jump. This could happen if federal officials make some hasty decisions in early January to delay all or some of the scheduled tax hikes, and/or yet again kick the deficit-reduction can down the political road. This means the outstanding public debt would keep growing.

What has so far been covered up by the liberal mainstream media is that, under Obama’s plan, “most of the spending increases in terms of sheer dollars will fall on (the) ‘non-rich,’” according to Barron’s. This is because payroll taxes and Social Security taxes on employees will likely increase, taxes on everyone’s dividends, interest and long-term capital gains will go up, and the alternative minimum tax on middle-income taxpayers might increase back to “pre-patch” levels.

Most likely, the nation will still be engulfed in a fog of uncertainty and fiscal irresponsibility when the sun comes up Jan. 1, and everyone will face higher taxes.

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About John R. Smith

John R. Smith is chairman of BIZPAC, the Business Political Action Committee of Palm Beach County, and owner of a financial services company.

  • Joe Budd

    That's right. The employee FICA portion paid by everybody working rises 50%. Both sides know that has to happen and they want to go over cliff so they don't have to address it. The Democrats will then argue the Republicans do not want to cut taxes on the middle class. The Republicans have absolutely no leverage until the debt ceiling forces a "non-essential" government shutdown. Then the real negotiations can take place. Might see a small patch shortly but nothing bigger for another month.

  • http://Bizpac Ted

    The debt ceiling debate is only more GOP embarrassment. They will look like someone who wants to welch on debts they have already agreed to pay. Like the last time. Boner and McConneck are leading the GOP into the crack again. I'll let you think on where that crack is.

  • Chance H.

    Fiscal cliffs have happened before. This time the "fiscal tightening" will consist almost entirely of tax hikes, which is what the Left wants. There will be an increase in federal spendng on entitlements and, in fact, total federal spending will actually rise again. And for each $1 the Feds spend, 40 cents of it will be borrowed. Net result: the country goes deeper into debt and the federal deficit likely increases. In spite of the tax hikes.

  • Charles

    It is political suicide to vote for a tax hike or spending cut. We will go over the cliff so the politicians can vote to cut a tax and restore vote getting spending. They may look silly now but thats politics.

  • Big Dem

    This is not about tax rates, the national debt, or government spending. This is the manifestation of Obama's vow to "transform America" into European-styled socialism. Obama is a totaliarian who believes an inherent evil, greed and lust for power resides in each individual that must be controlled by government. I believe exactly the opposite, which by sheer happenstance is the same political philosophy that led our founders to write the Constitution limiting power of government. Obama does not "hate" America; he sees it as a flawed colonial state that has robbed it's own citizens of their deserved wealth, while robbing the rest of the world even more. Obama is the culmination of 70+ years of Progressive work designed to change American culture to diminish the focus on individual liberty in exchange for the "collective good." By slowly infiltrating the media (newspapers, TV and movies) and the public schools (teacherss unions and university professors) with progressive liberals, they have shaped the mindset of generations away from individual freedom with a process psychologists call successive approximations. We are now on the verge of the last stand. It is not Obama who has put us here. He is simply the Hollywood prop Houdinied into office as the figurehead of a movement driven by labor unions, academics and intellectuals, communists-socialists and the ultra-rich (who love concentration of power because in insures them unrivaled access to economic power and control). No, the true responsibility lies with the Republicans, the self-professed keepers of the American Dream. These individuals sold us out long ago for their own seat at the table of the power elite that being a part of Washington affords. They are simply a part of the machine of government that is chewing away at the Grand Experiment. Do not be fooled by their slight of hand. They have provided the essential function of distracting us with false hope that they stand for the same principles as us while they actively participate in undermining them.

    What we will see, sooner or later, is a "fix" similar to the 10-15 "fixes" we have witnessed in Greece in the past 5 years, while America steadily declines. The resulting unrest will lead to greater demands the government "do something," which will be the justification for total errosion of individual freedom via the destruction of property rights. It is coming, folks. The only question is whether those Patriots left amoung us will stand and fight one last time.

  • John R.

    WOW, I think Big Dem is exactly right. The fiscal cliff is a skirmish, serious for sure, but a prelude and preamble of bigger battles coming.

  • Big Dem

    US Budget

    * U.S. Tax revenue: $2,170,000,000,000

    * Fed budget: $3,820,000,000,000

    * New debt: $ 1,650,000,000,000

    * National debt: $14,271,000,000,000

    * Recent budget cuts: $ 38,500,000,000

    Let’s now remove 8 zeros and pretend it’s a household budget:

    * Annual family income: $21,700

    * Money the family spent: $38,200

    * New debt on the credit card: $16,500

    * Outstanding balance on the credit card: $142,710

    * Total budget cuts so far: $38.50

    Make sense now?

  • John R.

    Perfectly…

    I would only add one other Dirty Secret about the U.S. budget: If the Obama administration succeeds in increasing the tax rates on those making over $400,000/year (the "rich"), this would only raise $70 billion—- or only $70 more to add to Big Dem's household budget income. That's why I say that Obama's negotiation objective is political, not economic.

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