Let’s get clear on reality here. If we were to “fix” the fiscal cliff completely, such that no spending was cut and no taxes raised, the deficit would get worse over the next 10 years by $1Trillion annually and total debt in 2022 would be, according to Congressional Budget Office projections, about $26-27Trillion. That’s $10-11Trillion more than today’s $16Trillion. “Fixing” the fiscal cliff isn’t fixing anything at all. It’s just maintaining the unsustainable status quo. The status quo is $1Trillion annual deficits. It’s just kicking the damned can farther down the damned road. It’s worse than economic denial. It’s pathologically delusional. Forget the “fix”.
The fiscal cliff is a package of changes set to install January 1st. It includes the cancellation of Bush’s 2001 and 2003 tax cuts, the reversion of Obama’s 2% social security tax “holiday”, the elimination of Obama’s 2010 tax credits and exclusions. the resetting of a raft of other taxes to 2000 levels plus the implementation of $1.2Trillion in spending cuts … the so-called sequestration deal that fell out of the debt ceiling debacle of 2011. In sum, just rolling on over the cliff, the CBO says, amounts to $6.3Trillion in reduced deficits and less borrowing in the next decade. Reducing the deficit: that’s a good thing, isn’t it?
Table 1: Tax Changes Taking Effect January 1, 2013
Tax Increase (2013 over 2012)
|Expiration of the 2001-03 tax cuts (not including estate)||
|Expiration of the payroll tax holiday||
|Failure to patch the Alternative Minimum Tax||
|Expiration of business expensing||
|Expiration of other “tax extenders”||
|New PPACA (Obamacare) taxes||
|Expiration of the 2009 stimulus||
|Estate tax increase||
|Total, Tax Increases||
|Source: Tax Foundation; Congressional Budget Office; Joint Committee on Taxation; Office of Management & Budget.|
Why, then, are we so adamant about “fixing” the fiscal cliff? Everyone from Barack Obama to Ron Paul is telling us the deficit has to come down, that we can’t borrow endlessly without ending up like Japan or Italy or <cold shutter> France. So why in bloody hell is the entire political class, Dem and GOP, left and right, in crisis mode trying to stop the tax increases and spending cuts that will happen on January 1st?
The Democrat’s #1 sacred cow is government spending. We can’t cut spending … the Loud Left hates that idea. The Republican’s #1 sacred cow is taxes. We can’t raise taxes … the Raging Right hates that idea. So how will we ever get the deficit in hand and avoid morphing into Japan or Europe?
A compromise deal now in discussion in WDC would, if the President gets his way, raise taxes by $1.6Trillion over ten years. The Raging Right hates that, but are willing to bend to it a bit. Obama also said during his campaign that he’s OK with spending cuts equal to $2.50 for each dollar of tax increase. The Loud Left hates that, but are willing to bend to it a bit. Grudging compromise: that’s the deal coming slowly into view.
Suppose this deal gets done in early 2013. Do the math. $1.6Trillion in increased taxes plus 2.5X that amount, $4Trillion, in spending reductions. That’s a $5.5Trillion reduction in next-decade deficits, about $800Billion less than would come from letting everything just go over the fiscal cliff untouched. But close enough for government work. I have heard no one challenge the size of Obama’s proposal. And if that’s now the agreed size of the deal that gets done, then the nature of the current negotiation becomes very obvious.
What we are actually negotiating right now is not how much the cuts need to be but where they are to hit. If the spending cuts currently baked into the fiscal cliff are not acceptable … and they clearly are not acceptable to anyone … then new, replacement targets that are equal in value over the next decade must be found. If the tax increases baked into the fiscal cliff are impossible … and everyone thinks they are … then other sources of taxes must be found.
That’s what the intricate dance of the negotiation is about. Alternative targets. Sacred cows that are expendable. The question is how many of those slaughtered sacred cows will come from the Democrat’s herd and how many from the Republican’s.
That’s the reality of it. Or rather, that’s 50% of the reality of it, the part we are talking about now.
Even if the whole $5.5Trillion in deficit reduction were enacted in 2013, there would still be between $4.5Trillion and $5.5Trillion more in deficits and $20-21Trillion in debt through 2020. Deficits would remain too high and debt too much. Another round of tax hikes and spending cuts deeper and more divisive than the ones we are discussing today would still be necessary within a year or two.
The mess we’ve made in the last 40 years is so huge it can’t reasonably be solved, and fiscal balance recovered, in one pass. We’ve got to steel ourselves to doing it twice, with some time between doses to adapt and adjust.
The deal under discussion is going to be a deal no one will love, but if we don’t solve at least the first half of the problem now I doubt we ever will at all. If we can’t gin up the political nerve to do this first $5.5Trillion we’re pretty much toast. And it’s quite possible we won’t find that will, that the political cost to Senators and Congressmen afraid of losing their seats in the next election if they “cave” will be too high.
We can certainly expect the conservative media will term the tax increases a cave-in, a cop-out, economic suicide, a total abandonment of principles. We can be assured the liberal press will label the spending cuts grossly immoral, a give-away to the rich, an economic and social disaster, an American version of the German’s despised “austerity” program.
Voices like Grover Norquist’s and Paul Krugman’s will be loud and doctrinaire. Sacred cows all have a lobby and deeply vested interests, and they will threaten and warn and bleat over every dollar taxed or cut. Whether the voices of the people will drown out the ideologues and beggars remains to be seen.
Our first gut check is on the way. We shall see, and soon, whether we have the courage to save ourselves … or whether I need to brush up on my French.