SMITH: Failure, fear and the fiscal cliff

By   /   December 14, 2012  /   No Comments

By Cameron Smith | Alabama Policy Institute

Americans are less than confident, slightly confused and even a little angry about the so-called “fiscal cliff”, and they have every reason to be.

FEAR OF FALLING: Bipartisan irresponsible spending is driving America’s fiscal problems.

The fiscal cliff is a result of Congress passing and President Obama signing the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”  temporarily extending tax provisions including the so-called “Bush tax cuts,” retaining unemployment insurance expansions, and reducing the employees’ portion of the Social Security payroll tax by 2 perent.  The extension of many of those tax reductions will expire on Dec. 31.

Then the president and Congress agreed to the “Budget Control Act of 2011”  and America’s political leadership agreed to cut spending by $1.2 trillion over 10 years, through an agreement by the Joint Select Committee on Deficit Reduction or through automatic across-the-board spending cuts known as sequestration.  The Budget Control Act also authorized an increase in the federal debt ceiling, which currently stands at $16.394 trillion. The committee approach failed and sequestration will be ordered on Jan. 2, unless there is further legislative action.  To make matters worse, with $16.366 trillion in current debt, the federal government will likely hit the debt ceiling in short order.

The tax increases, spending cuts and the debt-limit issue have been bundled together by politicians and the media to form the “fiscal cliff.”  The fear is that the combination of $109.3 billion in expected spending cuts and significant tax increases next year could ultimately send the American economy into another recession.  The potential downgrade to the U.S. credit rating makes the issue even more complicated.

Most politicians and the media fail to explain how the “fiscal cliff” came about or to provide a context.  Essentially Democrat and Republican political leadership are at loggerheads over how to cut $1.2 trillion from the federal budget over 10 years.  At the same time, those politicians waxing poetically about the “fiscal cliff” have spent more than $1.2 trillion each year for the past four years.

Bipartisan irresponsible spending is driving America’s fiscal problems.  A review of federal tax and budgetary numbers reveals spending that is so far detached from tax revenue that even confiscatory tax increases on the wealthiest Americans would fail to balance the budget.  If the government demanded all  of the taxable income from tax returns with adjusted gross income of $200,000 or more, Washington still would have produced a deficit in excess of $215 billion in 2009.

President Obama’s proposed budget notes that taxing high-income earners and increasing the estate tax would generate less than $100 billion a year in revenue.  That sounds like a lot of money … until it is compared to the borrowed money Washington spends each year.

Without hard, meaningful spending caps and reductions, sending more tax dollars to D.C. politicians will be about as successful at reducing the deficit as trying to douse a fire with gasoline. Any discussion of tax increases should happen after imposing fiscal restraints in order to give Americans confidence that their government is not going to continue a seemingly indefinite expansion.

Sequestration may be an interesting starting point.  In many respects, sequestration is the purest embodiment of the concept of “shared sacrifice” because both sides believe it to be an equally awful bargain.  The cuts are equally offensive to both sides of the political spectrum.  While many Republicans loathe cuts to defense spending, Democrats bemoan the equally allocated non-defense discretionary cuts.

The road to a federal government that lives within its means must start with spending reform.   To take the first step, both sides must share the pain.

Cameron Smith is general counsel and policy director for the Alabama Policy Institute.