Monday, December 03, 2012

Musings from the brink of the fiscal cliff

I couple of different people have asked me what I think about the “fiscal cliff” which has Washington all in an uproar these days. I do have a thing or two to say about it, so it seemed like a good occasion to break the long silence on my blog.

Before I get into my thoughts about how to deal with the current situation, let’s go back and review how we got here. This is essentially a manufactured crisis, a result of both Republicans and Democrats kicking the can down the road to the point where it can’t be kicked any farther. Three major events are set to happen around the end of December, 2012. Why then? Mainly because Democrats refused to deal with these issues until after Obama secured re-election. Like he did with Obamacare, whose most unpopular provisions take effect in 2013, three years after the law passed, Obama made sure to wait until he is no longer accountable to voters to enact the most onerous parts of his agenda. Republicans have gone along with this abdication of responsibility because they are deathly afraid of being blamed for government shutdowns or interruptions in government services. This fear is largely irrational, but nonetheless it has prevented Republicans from using a series of opportunities to achieve any progress towards fiscal responsibility. I expect the Republicans to cave again, and give Obama most of what he demands. I don’t think that Speaker Boehner has the courage or the strength of conviction to stand on principle. When it comes down to what is best for the country versus political expediency, he will choose the easy way out. You can count on it.

The first element of the “fiscal cliff” is the expiration of the Bush tax cuts. Democrats want to make permanent the cuts for the middle income taxpayers, acknowledging for the first time in 12 years that George Bush did cut taxes significantly for the middle class. Republicans want to make all of the tax cuts permanent. This issue has come up twice before. The tax cuts were originally scheduled to expire at the end of 2010. Ending the tax cuts to higher income people is a cornerstone of Obama’s class warfare demagoguery. Obama has used devices like the “Buffett Rule” fraud to lead people to believe that the “rich” are “not paying their fair share” of the tax burden. His efforts were so successful that more than 90% of Obama voters answering an exit poll after the 2012 election agreed with the statement “The rich pay a lower tax rate than the middle class.” At the Democrat convention, one reporter asked many Democrat delegates what tax rate would be fair for rich people to pay. Most of them said that the top rate should be 25 or 30%. They didn’t realize that the top rate is already 35%, and Obama wants to raise it to 39.5%. The Democrat’s position is that unless the “rich” are taxed more, everyone will be taxed more. Republicans want rates for everyone to stay exactly where they have been for the past 10 or 12 years. Obama has said that allowing the middle class tax cuts to expire amounts to a “lump of coal” for Christmas. Obama wants to deliver a lump of coal to the very people who create most of the jobs and produce most of the goods and services that we all use. There is nothing “fair” about raising taxes on the 5% of taxpayers who already pay more than the rest of us combined. I don’t earn even half enough to be affected directly by that tax increase, but I do hope to earn that much someday, and punishing success and productivity through confiscatory taxation makes it harder for everyone to achieve success. Does anyone believe that the problem is that government simply doesn’t have enough money to spend? Seriously?

In addition to the Bush tax cuts, the AMT fix is about to expire. The Alternative Minimum Tax was passed in 1970 to make sure that 155 super-wealthy families could not use tax loopholes to dodge taxes altogether. However, the income amounts in the bill were not indexed to inflation, so with decades of inflation, it would now impact millions of taxpayers. Every year or two, Congress amends the tax so that it continues to apply to only the very highest income taxpayers. Congress could permanently change the law to index to wages, making the repeated patches unnecessary. But they don’t, because they use the tax to pad their long-term budget projections. The CBO uses the law as passed to project the budget deficit for the next ten years. Because the AMT is only changed for this year, they generate projections as if that tax would be collected for the following nine years, even though everyone knows that it will not be. It’s another form of cooking the books, like the Medicare “Doc fix” and arranging Obamacare to collect taxes for the first ten years while only providing benefits for six, to make the bill look like it is deficit neutral. Like the Bush tax cuts, the AMT patch expires at the end of 2012. Without a new patch, millions of families will be hit by a much larger tax than was ever intended.

Remember that the Social Security payroll tax will go up on January 1, 2013 as well. No one is talking about this regressive tax increase which affects every person with an income. When Democrats or Republicans tell you that we can't have a tax increase on lower income people, ask them if they are now in favor of keeping this years payroll tax rate permanently.

The second part of the “fiscal cliff” is an automatic, across the board spending cut. This is the result of a “debt ceiling” deal cut by Congress in 2011. Democrats promised a package of spending cuts in return for an increase in the debt ceiling, allowing them to continue their reckless spending binge. The spending and the debt happened, but not the spending cuts. The default spending cut specified in the deal was an across the board cut. When the deal was cut, no one thought that the default could ever happen. I think that the Republicans failed to think it through, because they would have realized that huge cuts to the military are a Democrat’s dream come true, and the threat of such cuts would give Democrats leverage to demand pretty much anything they wanted. Of course Social Security, Medicare, Medicaid, and the rest of the entitlement programs will be cut too, but that can be blamed on the Republicans. You’ve heard the line over and over: “Republicans threw the poor and downtrodden people under the bus to protect millionaires and billionaires.” Or “Republicans are balancing the budget on the backs of the poor.” Or “Republicans are holding the middle class hostage to the interests of the fat cats.” But Democrats have not offered up their own proposed spending cuts or suggested a way to reform entitlement to prevent them from going bankrupt. Instead they push us at an ever-increasing rate towards a fiscal collapse which will make Greece look attractive, never mentioning that government dependants will bear the brunt of that disaster.

The final component of the “fiscal cliff” is the debt ceiling, which we will reach in early 2013. Congress has raised the debt ceiling twice during Obama’s first term, but the ravenous appetite of the government knows no limit. Whatever money is available to spend, it will spend. In 2008, Obama called President Bush “irresponsible” and “unpatriotic” for adding $4 trillion to the debt in eight years. Obama has added $6 trillion to the debt in four years. Obama has had months in which he racked up more debt than Bush did in the entire year of 2007. Obama’s demands include giving him the authority to raise the debt limit without the approval of Congress, allowing government spending to be even further out of control.

I think it is fair to say that Obama inherited a worse situation in his second term than he did in his first term. Who will he blame this time?

Obama’s proposal is to raise the top tax rate, pass a new stimulus package, eliminate the debt ceiling, and promise to cut spending later. You may remember that George HW Bush agreed to a similar deal, including tax hikes with the promise of spending cuts later. Twenty years later we are still waiting for Congress to make good on those promised spending cuts. We would be fools to accept another promise to cut spending later.

Obama claims that he has a mandate to raise taxes on the “upper class”, reverting to his standard class warfare rhetoric. America doesn’t have a class structure. This is not India where people are born into a caste where they will remain for life regardless of their merit, unable to improve their situation. Obama’s exploitation of dependency and resentment and his policies of redistribution destroy the opportunity which free market capitalism provides for anyone to achieve unlimited success. Rush Limbaugh called Obama “Santa Claus” because his party is based on giving away “free” stuff. I think that is slanderous to the jolly old elf. After all, Santa Claus is a producer, not a redistributer. He makes the toys, and they are his to give as he wishes. He doesn’t confiscate the toys from one group of kids in order to curry favor with other kids. Obama was re-elected, so it can be argued that he does have a mandate, but if you listen to what Obama voters said in the exit polls, his mandate is not for higher taxes on the producers, which didn’t even make the “top five” most important issues to Obama voters.

On the other hand, voters also re-elected a Republican majority in the US House of Representatives, and those people ran on a platform of lower taxes, fiscal responsibility, and less government dependency. So a majority of the members of the House of Representatives, where all legislation relating to taxation and spending begins, have a mandate to oppose tax hikes and spending increases, and to pursue pro-growth policies of lower spending, entitlement reform, and fiscal responsibility.

The government can’t spend a dime without the approval of the House of Representatives. The House could take a principled stand by passing a budget package which makes all of the Bush tax cuts permanent, reigns in spending significantly, reforms entitlements in a way which averts the coming bankruptcy of those programs, and eventually balances the budget. Harry Reid’s Senate, which has not passed a budget in three years, would declare the House bill DOA, and together with the White House demagogues, they would blame the Republicans for sending us over the fiscal cliff. Then, in 2014 they would retake control of the House and ram their entire tax and spend agenda down our throats anyway.

Or Boehner could do like he did in the past few fiscal showdowns: give Obama all of what he wants in return for a few insignificant concessions. In the debt ceiling negotiations, Boehner started off asking for $100 billion in spending cuts. He cut a deal, reportedly for $38 billion in spending cuts, but in the end it turned out to be something like $300 million in actual cuts, an utterly meaningless trifle in the context of a government which spends trillions of dollars every year.

Is there a better alternative to caving?

First of all, Republicans must make it clear that any solution must be in the form of a budget. Harry Reid’s Senate has refused to meet the most basic of their Constitutional obligations by passing a budget, which would make them accountable for their unhinged spending binge. Obama has argued for a “balanced approach” to deficit reduction, by which he means tax increases and spending cuts. But his proposals have included only tax increases and spending increases, with actual spending continuing to increase at a staggering rate. That is not a balanced approach. Tax increases should be off the table until Democrats agree on entitlement reforms and sweeping cuts to non-defense spending which will get us on track to balance the budget in a few years. Until they show us a budget which spends less in 2013 than they spent in 2012, we won’t discuss increasing taxes on anyone. Otherwise there is no reason to think that any additional money taken from the private sector will simply be spent in the public sector.

Second, the House should pass a tax reform package making the current rates permanent, and permanently cutting the 25% bracket to 22% and the 15% bracket to 12%. Obama and the Democrats, who claim to be the self-appointed champions of the middle class, should have no hesitation in reducing the tax burden of millions of middle and lower income workers. Send the package to the Senate and let them pass it or reject it. If they refuse, any tax increase which happens can only be because Democrats refused a middle-class tax cut simply because it did not punish the wealthy. Cutting taxes and removing the threat of an impending tax increase is the best thing we could do to revive the economy and end the Obama malaise, and in the long run, a growing economy with more people working and paying taxes and reinvesting their own money is the best way to reduce the deficit and balance the budget.

Finally, the debt ceiling should be changed from a fixed amount to be indexed to GDP. The ceiling should start out at its current percentage of GDP, with that percentage gradually decreasing over time to force a gradual reduction of our dependence on debt. This stops the debt ceiling from being a political football which must be dealt with over and over, and instead turns it into a predictable guard rail to get government spending back under control. Republicans need to understand that the debt ceiling is the ultimate leverage which Republicans have in this showdown. Howard Dean recently revealed, in an unguarded moment of honesty, that Democrats would secretly love the opportunity to raise taxes on everyone and return to Clinton-era tax rates, and they can barely contain their excitement at the prospect of cutting defense. But the debt ceiling is a direct threat to their very life blood -- an ample supply of other people's money to spend on their cronies, dependents, and special interest groups. The ability to deliver free goodies is the secret to Democrat's grasp on power, and a threat to that power is a dire threat to the very existence of the Democrat party. Republicans can get a lot of what they want by tying it to the debt ceiling. Remember that the producers of the Republican party could exist indefinitely and even thrive without the welfare state, but the government class and their dependents couldn't last a month without government handouts.

The term "Fiscal cliff" is intended to inspire fear, but the true disaster awaiting our nation is not reaching January 1, 2013 without Republicans giving in to Democrat's demands. The real catastrophe is what happens if we remain on our current course of spending unmoored to the realities of government revenue, borrowing more and more from China, promising more future benefits with no means to pay for them, eventually reaching a point where America’s obligations grow faster than our economy, destroying our creditworthiness and leaving us with high interest debt which we can never pay off.

Of course the best way to get the government back to fiscal sanity was to fire Obama, repeal Obamacare, and put in place a long-term plan reinstituting constitutional Government under law, implement free market reforms, low taxes, pro-growth policies, and individual liberty rather than government dependence. That didn’t happen, but there are still better alternatives than surrender or political suicide. It will require twisting the Democrat’s arms, and even holding the RINO’s feet to the fire, but if he’s not up to the job, Boehner should step aside and let a real leader lead.

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