Fiscal Cliff

Compromise: a settlement of differences by mutual concessions; an agreement reached by adjustment of conflicting or opposing claims, principles, etc., by reciprocal modification of demands.

 

To compromise means to make concessions, to listen to the other side and take some of their ideas, and some of your ideas, to come up with a solution to a problem. Compromise is not digging a trench and demanding that the other side do as your command or you will destroy the vary fiber of their being. 

 

The reason I am writing these things is because there is a war raging in this country. Fear fuels both sides of this bloody conflict. Our nation has been brought to the edge of a great precipice. Behind us the warm glow of prosperity, before us the crushing dark abyss of poverty and despair.  I speak of course of the looming fiscal cliff.

 

Before us there are two choices, we either fix our fiscal problems, or we fall into the nothingness of history.  We can either fix the problems that brought us to this crisis, or we can continue our brainless bickering as we plummet to oblivion. We can either grow up and end this perpetual campaign cycle, or we can accept that we are soon to be nothing more than a part of a lesson plan in a child’s history book. As real to them as the Romans are to us, dusty relics of a bygone era. The petty rivalries of this age will mean nothing to our kids.  They will fail to see the importance of party loyalty if we fail to ensure the limitless bounty of liberty for our future posterity.

 

To solve this crisis, we must understand it. We must understand what brought us to the event horizon of oblivion. We must also understand, and be willing to utilize,the concept of compromise. We must be willing to give and take, and move forward. We must be able to admit when we were wrong, and when others were right.  If we don’t, our nation will cease to exist.

So what brought us to our current state? The plain and simple fact of the matter is that we spent more money than we bring in.  It doesn’t matter what side of the aisle you are on, the issue of our fiscal state was caused by spending more money than we bring in. If we are unable to agree on this point, there is no hope for our nation, and no point for you to continue reading or bother posting.  Our nation is in debt because we spend too much money, end of story. We bring in X dollars of revenue and spend X+1 dollars. 

 

So we understand the problem.  We are spending more money than we have, the question at the heart of this crisis is how are we going to solve this problem. There are two sides of the argument:

          Option 1: Get More Money

          Option 2: Cut Spending

This is where the simplicity of the argument ends. The two sides of the discussion have so muddied the water and so divided the nation we are unwilling to look at the facts surrounding the situation.  So remembering that this fiscal crisis was caused by spending more money than we brought in, we are going to look at how to solve this crisis.

 

So to begin lets discuss the two options before us. The first option is to simply get more money. While that seems simple, as is often the case in life, the issue is more complicated than it appears. There are several theories on how the government can increase its revenues.

The argument from one side of the aisle is that for the government to increaserevenue it must raise tax rates. Before we go any further I must clarify what this means. Sense we live in a republic we are not subjects to an all powerful government.  The government cannot just take what it wants; we give it money to operate on our behalf. It does not give us money to live on, out of its good graces. So when the government increases tax rates what that means is that it is pulling more money out of the private sector and placing it in the government sector. So every dollar the government spends is a dollar taken from private citizens, and must be viewed as such. What does this mean? When the government takes money out of the private sector it is taking away a resource. That resource could be used by companies to expand, innovate, and grow, or by individuals to purchase those companies products. By raising the tax rates, the government is adding an increased cost onto the economy. What this means is that it costs companies more to make aproduct, thus the price goes up, and consumers have less money to buy a more expensive product.  Thus the economy slows, incomes fall, and revenues into the government drop.

Evidence of the negative effects of raising tax rates on government revenue can be seen time and time again throughout history. The most recent example comes to us from Great Brittan.  In 2010 the British Government increased the tax rate on top earners in the country from 40% to 50%. Now one’s first thought would be that the British Government’s revenue would have sky rocketed. What actually happened was quite different. From 2010 to 2012 Great Brittan lost 2/3’s of its millionaires, and with that their revenues dropped 7 billion pounds,or about $11,270,000,000 dollars. What this means is that by raising taxes the government lost revenue. By taking money from the economy, the government weakened its revenue stream. Due to these results the British Government has lowered its tax rates to 45%. 

 

So if raising tax rates negatively impacts revenue, how are we to increase revenues? One theory for how the government can increase its revenue is actually by cutting the tax rates.  I know it sounds counter intuitive, how can cutting tax rates increase revenue into the federal coffers? But if we remember that the government’s revenue is generated by taxes, taxes are based upon income, and income is based upon economic activity the answer becomes clear. By cutting tax rates, less money is taken out of the hands of individual Americans, which allows them to spend that money. Mobile capital keeps the economy growing, and the growth of the economy means more people have the chance to make more money, moving them into higher tax brackets thus they pay more taxes.  This has been done several times over the last century. Presidents Kennedy, Reagan, and Bush used tax cuts to increase federal revenue through growth.

President Kennedy Tax Cut: Cut the top marginal rate from 91% to 70%. Resulting in a steady 5.5% growth in the economy, unemployment fell to 3.8%, and the deficit fell from $7 billion to $1 billion.

President Reagan Tax Cut: Cut taxes a crossed the board. Cut the top marginal tax rate from 70% down to 28%. We all know what a horrible decade the 80’s were, rapid job creation, and low unemployment.

President Bush Tax Cut: Cut taxes a crossed the board. Cut the top marginal tax rate from 39.6% to 35%. Government receipts grew from $794 billion to $1.2 trillion in 2007, a jump of almost 45%.

 

There are even examples of the benefits of cutting taxes on federal revenues during the Clinton Years. Everyone has heard of the supposed “Clinton Surplus”, well those massive reductions in the deficit didn’t occur until 1997. In 1997 the GOP controlled congress passed a tax bill that cut capital gains rates from 28% to 20%. Stock and other capital investments more than tripled. The results, from 1997 to 2000 “the increase in capital gains revenues accounted for a little over 20% of the total increase in federal revenues” as said by former treasury official Bruce Barrlett. Individual tax receipts hit $1 trillion for the first time, right before the dot com bubble burst of 2000, and the small recession that fallowed.

 

The other option for cutting the deficit is one that people implement everyday around this country.  When faced with a revenue short fall, families around our nation cut the amount of money they spend.  If you have a fixed revenue stream, and your expenditures exceed that revenue stream, you must reign in your expenses. You do that by cutting spending.  So a logical argument for solving a deficit problem, would be to cut spending.   The current tax rates have been established for over ten years. The federal government has known the tax rates and the revenue that those tax rates resulted in for almost ten years.  For almost ten years the federal government has been spending well over that. It is obvious that it is not the revenue that is the problem, but rather it is the attitude in Washington that is the problem.

 

What has lead us to the fiscal cliff is not that we tax too little, but that we spend too much.  The government fought two wars, rather than cut spending somewhere else to fund those wars, they were paid for on credit.  The government decided that in order to bail out the economy they should appropriate almost a trillion dollars to various government agencies, but rather than cut spending from somewhere else to keep the expenditures within the revenue stream, they used an Enron style tactic of mark to market, claiming that the resulting economic growth would pay for the spending, it didn’t.  The government decided that allowing the auto industry to go through a managed bankruptcy was too risky, so they decided to buy out the auto industry, but rather than cut spending elsewhere to ensure federal expenditures did not eclipse federal revenue, they claimed that they would make that money back when they sold off the shares of the company, they didn’t sell them all, and the ones they sold they sold at a loss.

The fat cats in Washington utilize a lovely system of budgeting called baseline budgeting.  What this entails is that every year every government agency gets a 3 to 10% increase in their budget, whether or not it is warranted. So every year government expenditures grow regardless of the revenue stream.  A great example of the dangerous nature this system is the stimulus bill. The stimulus bill in and of itself did not add that much to our national debt. But thanks to base line budgeting, the stimulus’s lasting effects become a major cause for fiscal concern. Let us look at how the stimulus bill has added to our deficit thanks to magic of base line budgeting.  We are going to assume a 3% increase a crossed the board on the 787 billion dollar “one time” expense of the stimulus bill.

            Year One 2009: $787,000,000,000

            Year Two 2010: $787,000,000,000 +3%= $810,610,000,000

            Year Three 2011: $810,610,000,000+3% = $834,928,300,000

            Year Four 2012: $834,928,300,000 +3%= $859,976,149,000
            Four Year total cost                                         $3,282,514,449,000 over 3 trillion dollars.

Now this is not just me picking on the stimulus bill, I am trying to show you how a simple “one time” expenditure can quickly grow into a massive part of the debt.  The deficit in 2012 was $1.1 trillion, the cost of the stimulus bill using our above assumption by 2012 was $859 billion dollars, or roughly 78% of the deficit. All from a “one time”expense. 

So thanks to baseline budgeting, government expenditures are free to grow, without putting politicians in any political risk. Worse yet, it allows for a dirty political trick that pulls at the strings of many conservatives like myself.  Baseline budgeting allows for Washington to cut the growth of a government agency and claim that it has cut spending.  Let us use an analogy, say buying a car.  You need a new car, you have been saving and can afford the payments on a $40,000 car.  You go to the dealer, and start looking around, and the salesman shows you a $70,000 luxury car. You really like the car, and want it. The salesman  then tells you that the car is on sale for $60,000 dollars. You of course jump on that sale, and brag to your friends how you saved $10,000 on your new car. Of course you didn’t save any money, you infact spent $20,000 more than you could afford.  The politicians in Washington are doing the same exact thing to us. They cut the growth of spending and brag about how they saved us so much money, they didn’t save a dime, they didn’t reduce spending a cent. It is a shell game, created to ensure political careers of inferior men.

Now we know what must be done to reign in our wildly out of control deficit.  We must cut spending, and grow our economy. However there are many who are dead set and determined that despite what history tells us, in order to solve this problem we must increase our revenues, and we cannot do so through economic growth, but rather it must be done through increasing tax rates.  There are also those, myself included, who do not want to raise taxes because history shows us that it is a sure fire way to hurt your economy, and cut off the revenue stream. So here we sit, one side demanding tax hikes the other side wanting spending cuts.  Now comes time for that lovely little word compromise.

We all know the story. Democrats want tax hikes, Republicans want spending cuts. the question now is how do we come together to make sure both sides have something they can vote for. Compromise, both sides must be willing to give something up, in order to appease the other. 

It has become clear that the progressive, most of whom are Democrats, are more than willing to let the country go over the fiscal cliff unless conservatives cave and allow them to raise tax rates on the top earners in the country.  They are willing to raise middle class tax rates, crash the economy, and return us to economic recession, all because they are unwilling to compromise. We all know the story conservatives do not want to raise the tax rate, and want to cut spending. Progressives demand new revenue in the form of raising tax rates, and more spending.  So in an effort to compromise the GOP put revenues on the table. They don’t want to raise the tax rates, but they are willing to limit deductions, something that in 2011 President Obama had proposed. On July 22, 2011 President Obama said “what we said was, give us 1.2 trillion in additional revenues. Which could be accomplished without hiking tax rates, it could simply be accomplished by eliminating loop holes, eliminating some deductions, and engaging in a tax reform process which could lower rates generally while broadening the base”. At the time many mocked this plan, myself included. But now in the interest of compromis the GOP put forth a very similar plan.   President Obama shot it down,and sent out his press secretary to tell the American People that the very plan he once put forth was nothing but “magic beans and fairy dust”. So he has drawn a line in the sand, new revenues must come in the form of a tax hike. The GOP compromised on revenues by cutting deductions, the progressives in the Democrat party compromised on, nothing.  So who is unwilling to compromise? Obviously the GOP because they won’t raise taxes like the President demands… well that’s what the narrative will be in the mainstream media.  The truth though is that it is President Obama and the progressives within the Democrat party are the ones who are not compromising.They want increased revenues through tax rates, the GOP didn’t want increases in tax rates but to avoid raising rates, the GOP offered up closing loop holes and deductions, which has the same effect, the rich pay more taxes.  That is called a compromise, but President Obama refuses to accept anything short of exactly what he demands. He demands that taxe rates are raised, and nothing short of this will appease the bully on the hill.

So we now face the staunch reality that Washington is broken and we will go over the fiscal cliff. Our taxes will go up, all because President Obama was unwilling to offer up a true compromise. Prepare yourselves, so you can be an island for those lost in the sea of turmoil that is about to unfold.

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2 comments
  1. http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/I watched this video last night and it is a very good illustration of why we are in the mess that we are in economically. I think that socializing healthcare is not the answer the way that Obama is trying to push it onto us to solve our economic crisis, but this video is scary how we are constantly borrowing money and never thinking that payday is going to come. :/PS. I also do not believe that funding abortion should be a priority of our government EVER. However to the Obama administration, the more babies the government allows to be killed in the womb, the less money that it will take to sustain the economy. Again, another sobering thought…

  2. This “sequestration” plan is and was nothing more than smoke and mirrors – the smoke is from burning bullshit.The “conservative” “free-market” “Constitutionalists” that comprise the GOP majority are mostly interested in three things:1. Milking the donors.2. Getting elected or re-elected.3. Milking the general public using the spoils system.We’ll be at the true fiscal cliff when Granny’s Social Security stipend isn’t deposited in her account, Medicare doesn’t make payments to doctors, the EBT cards quit working at the local Wal-Mart, and public-sector employees don’t get paid. That time is approaching and will arrive sooner than we think.

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