"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Thursday, November 29, 2012

Should We Just Go Off the Fiscal Cliff?

I believe we have to do something drastic quickly to get America's federal budget under control.   Yet I also believe that the current political class is incapable of making a reasonable deal that would recognize that spending is the problem.   The Democrats want to raise taxes on the "rich," and that's about it.   What we actually need -- deep cuts to Social Security, Medicare, welfare programs, discretionary spending, etc. -- are apparently impossible.  

So what about the "fiscal cliff" of mandatory, automatic cuts and tax increases scheduled to take place on 1/1/13?   Here's the ten key components of the cliff.   For my money these can be divided into two main areas, taxes and spending:

  • Bush tax cuts would expire, including the 10% bracket for low earners, and the 35% bracket for high earners.   The highest bracket would go to 39.6%, a nearly five percent increase.    Dividends would also be treated as ordinary income (a huge tax increase for those who derive significant income from dividend producing stocks), and long-term capital gains taxes would go from 15% to 20%, another huge hit to the saving and investing classes.   Meanwhile, the AMT patch for inflation would expire, making that monstrosity hit a lot more middle-class families; the estate tax would kick in above a $1 million exemption (as opposed to the current $5 million; everyone would get a 2% uptick in their Social Security payroll tax; and additional taxes would be imposed due to Obamacare.  
  • Automatic spending cuts to defense and discretionary spending and caps on growth of discretionary spending would kick in totaling approximately $330 billion over two years.   In addition, the "doc fix" for Medicare would cut reimbursement to physicians by approximately $305 billion over the same two years.   Finally, unemployment benefits would be allowed to expire and will roll back to a limit of 27 weeks, saving $30 billion over two years.     
 As I look at these there are obviously things I don't like.   I don't like raising taxes on productive people to essentially confiscatory levels.   I don't like raising taxes on investment (dividends and capital gains) or long-term frugality (the estate tax).   We shouldn't be taxing people two or three times on the same earnings just because they chose to save it.   I don't like the AMT, largely because it unnecessarily complicates the tax code.   I don't like cutting defense at all -- we live in a dangerous world.

On the other hand, we also don't live in a perfect world.   I can't get what I want.   There are things here I like.   I like the fact that we aren't going to pretend that we can underfund Social Security by cutting payroll taxes, and I like the fact that letting that cut expire gets everyone some skin in the game.   If taxes are going to be raised, the pain needs to be shared.   I like the spending cuts other than defense, although they don't go far enough, and it appears that the price of getting them will be to cut defense as well.   So be it.   The only way we are legitimately going to maintain ourselves as a superpower will be to get our fiscal house in order.   It doesn't make much sense to borrow money from China to build a blue-water navy to fight China.

I also like removing the disincentive to work that extended unemployment benefits creates.

Also, time doesn't stop on 1/1/13.   There are probably parts of the fiscal cliff that could get fixed by new legislation fairly quickly, like the higher taxes on investment and the estate tax. 

This is a long-winded way of saying that going off the fiscal cliff wouldn't be the end of the world and might make us get serious about doing something about the deficit.


UPDATE:  Jim Geraghty at NRO seems to feel the same way I do:
Obama’s negotiating stance and tactics suggest he’s extremely convinced that going over the cliff, with the attendant double-dip recession, is a scenario where he wins politically. Maybe it’s worth seeing if that confidence is well-placed.

Look, whether roughly 51 percent of voters realize it or not, in November they effectively voted for another recession. Might as well get it over with.


UPDATE 2:  So does Ace:
Why not... give Obama his tax hike on the rich and the small cuts he's willing to agree to -- and then refuse to raise the debt ceiling any further?   Call him out. "You said you could balance things with these measures. So do so."

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