The Mythical Fiscal Cliff

Every drive to work, every drive home, every news clip, every pundit seems to have something to say about the so-called “Fiscal Cliff”. Each side claims the other is holding “the middle-class tax cuts hostage”, or that the other side’s plan is laughable or unworthy. Sadly, while there isn’t really a cliff, both sides are right about each other. Here is why. They are both wrong.

Shoot The Hostage
First, let us deal with the claim of hostage taking.

Obama claims Republicans are “holding the (existing) middle class tax cuts hostage”. Why? So they can keep the existing tax cuts they got along with everyone else. Side note: if you pay no taxes you get no cut because reducing 0 by 80% still means zero. And yes, one could make that argument. The Republicans are (so far) refusing to budge on that aspect. Is that holding something hostage? No. It is standing on a principle. The Republicans believe, right or wrong, tax increases on the rich are bad idea. The idea has merit and is worth discussing.

Obama is also “holding them hostage” as much as the republicans in that as he insists that no deal is possible without increase the taxes on “the rich”. This is his principle he is standing on. If one could solve the financial problem by taxing the rich more, the idea would have merit.

Both sides are standing on a principle. We should not be bashing the side we dont’ agree with simply because of that. We should stop bemoaning the lack of character and presence of “flip-flopping” or “waffling” when we call out for one side to capitulate on their principles simply because of an election - and more accurately our biased conclusions based on one election. These two acts are mutually exclusive. That aspect of this problem is squarely on us. Either we want people in office who have the courage of their convictions and will stand on their principles, or we want people who will lick their finger and see where the wind blows to determine their stand today.

So, neither side is holding something hostage, they are standing on their principles. We don’t have to agree with the another side’s principles to respect them holding to them. Yet, this is not entirely our perspective problem. Democrats and Republicans alike need to do this with each other. They can start by realizing these fundamentals and put aside the “let us bash the other side” mentality. You’re both being petty, kids, now put your big (boy|girl) undies on and be respectful. Stop using the hostage assertion.

What Can Work?

So, having set aside being snide and childish, let us look at the basic premises of each side’s proposals. Step one: can you solve the financial problem by raising taxes on the rich and letting the middle class keep their current tax level?

I’ll adress the first piece, and then if needed the second. Can you raise taxes enough to solve the problem? To answer that we need to clarify the question; what is the problem? The problem is the federal government is spending 50% more than it takes in. It spends about 3.6 trillion dollars and takes in about 2.5 trillion. So, we can now grasp the problem. We need to a) cut spending by 1T dollars, b) raise revenue by 1T dollars, or c) some combination of the two. For this portion of the article, we are looking at option b - raise revenue by around 50%.

Yes, I said by 50%. Do the math. If you favored taxing the rich and letting the middle class keep their “cuts”, you may now be asking yourself if it is possible to raise taxes by that much. In a word: no.

First, what does the income distribution look like? The IRS collects about 1T in  income taxes, by far the largest source. To get there simply you need to double ALL income taxes. Now we have some perspective. Of that 1T in income taxes the top 10% of income earners pay 70%, or about 700B USD. So, now you can begin to see that even if you doubles the taxe rates on “the rich”, you won’t get there. Assuming (incorrectly) that doubling the taxes on the rich had zero downsides, assuming it would not lead to them shifting their assets, income, etc. in ways to avoid the increase in any way, you could get 70%. That still means spending 300B more than you take in. That doesn’t solve the problem.

“But, the president said it will bring in 1.5 trillion, so you’re wrong!” some of you will say. I respond by pointing out that isn’t what his proposal says. I am talking per year, he is talking about doing it over a decade. Thus, we are talking about an average increase of about 150B in taxes, maybe, coming in 2012 from taxing the rich more. Only 850 billion more to go! And to be clear, that 150B isn’t from simply letting the tax cuts expire. The tax cut expiration is only estimated to produce at best a 52 billion dollar increase. Those tax increases to get to the 150B have to come from somewhere, folks.

So now we can see that the Administration is playing “use big numbers to confuse people” gambit. We all know, but avoid thinking about, Congress does not sit down, write a 10 year budget, and then stick to it. Congress and the POTUS are likewise not ignorant of this. So why should we talk like it is true? We should not.

Oh, but the spending cuts, he makes it up by cutting 800B in spending, right? Again, no. Here we know the “spending cuts” are not front loaded, so even if we assumed an even distribution over 10 years we are talking about 80B per year. That is so low it should be laughed off. Especially when he wants to add 50B more next year as another stimulus/bail out.

For those who didn’t catch it, Obama wants to get 50B in stimulus and raise taxes ont eh rich by 52 billion. Thus, the tax cuts “for the rich” amount to 4% more than he wants to raise spending on stimulus alone.

So, clearly we can see Obama’s plan doesn’t actually solve anything. Even under ideal circumstances for it we would still spend about 760 billion dollars more than we take in. Thus, like the Republican’s proposal it doesn’t work. So how about the Republican proposal?

First, they suffer the same delude-the-people mentality of using ten years as their period to account for one year budgets.  They claim 2.2 trillion - over 10 years.  This is supposed to include cuts as well as tax increase in the form of closing deductions and loopholes. The same math applies: at best that means 220B per year, 80B of that from raising taxes.

It should also be noted that both sides assume the economy will take off and provide tax revenue increases. I don;t see that happening in 12 months, do you? Over ten years, if we get our houses in order, yes. But we should not make budgets based on believed growth 5-10 years from now.

So neither “plan” actually solves the fiscal problem. Just more smoke and mirrors. It is nothing mor ethan kicking the can down the road and badgering the American people about each other. Is that what the American people voted for last month? I doubt it.

But what about the cliff?

Like the spoon, there is no cliff.

Again, it’s a numbers gambit.  The headlines claim a 1.2 trillion dollar spending cut happens in January if certain conditions are not met. Well that is certainly more than the 1 trillion dollar deficit, right? Nope, read deeper.

The Congressional Budget Office (CBO), says federal spending in 2013 would drop by 65 billion. Yes, that’s right, a mere 65 billion dollars is what the fuss is about. Politicians are convincing us that a cut of 65 billion dollars will throw our economic lives into chaos.

Yet both sides claim to propose spending cuts for next year that are larger than that. Yes, you are right; that doesn’t make sense. Somehow, the Bush days were horrible spending that wrecked the economy (half right: it was a horrible spending spree), but the Clinton years were golden. During the Clinton administration we were spending about 2.2 trillion per year.

So if it was a great economic time under Clinton, and we want that back, perhaps the real solution to the fiscal cliff is to go back to it. Sure, use the Clinton era tax rates and use the spending of then to go with it.  Imagine the time and money we could save by blowing the dust off of the budget of say 1994, 1995, or even 1996 along with the tax code of that year and call it a day. Think about the economic boost we could have by simply going back to what Republicans and Democrats seem to agree on: the taxation and spending policies of the 1990s.

We’d avoid so-called fiscal cliff, the Administration would get an allegedly Democrat spending and tax rate, and an allegedly balanced budget while the Republicans would get their spending cuts. And we the people would get some much needed relief from the stupid games they are perpetrating on us in the name of saving us from them.

Bill Anderson avatar
About Bill Anderson
Just your frendly neighborhood curmudgeon!