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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John R. Smith


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