Forget the Fiscal Cliff, What About the Fiscal Black Hole?

Tim Bean

11/19/2012

During the election there was a little talk about the so called “fiscal cliff.”  Now that the election is over there is even more talk about this looming catastrophe.  Well, to be honest most of the talk is about the Patraeus affair, and all of the other soap opera stuff surrounding it – sex, money, and power is a whole heck of a lot more interesting than the dry talk of fiscal cliffs.  Anyway, it is the fiscal cliff that should have most peoples’ attention, because it can affect pretty much everyone.

So what is this “fiscal cliff?”  Well, in short, due to the fact that we haven’t actually had a budget in this country for four years now (plenty of blame lay at both parties’ feet) and part of the emergency plan that raised the debt ceiling, there were a set of things that could happen at the end of this year which could put the economy back into recession.

What kind of things?  Well, below is a list of those “things” that would happen:

• The expiration of the “Bush era” tax cuts of 2001 and 2003. Most notably, this would raise income tax rates for most people to levels that were in place prior to 2001. It would also change other tax provisions, including an increase in taxes on dividends and capital gains, a decrease in the child tax credit, and a reinstatement of phasing out some itemized deductions and personal exemptions for higher income individuals.
• The end of the “payroll tax holiday” that reduced an individuals’ Social Security taxes by two percent.
• Less benefit from the American Opportunity Tax Credit, which provided up to $2,500 per student in credits (a dollar-for-dollar reduction in taxes) to offset qualified higher education expenses. In 2013, income limits to qualify for the credit– which will revert back to its prior name, the Hope Scholarship Credit – are lowered and the maximum credit is reduced to a projected $1,950.
• The loss of the “patch” that allowed many middle income Americans to avoid exposure to the Alternative Minimum Tax (AMT).
• A drastic reduction in the exclusion amount for the estate tax from $5.12 million per person to $1 million, and an upturn in the highest maximum estate tax rate, from 35 percent to 55 percent.
• The implementation of a higher income threshold to qualify to deduct out-of-pocket medical costs as an itemized deduction. Currently, expenses valued at more than 7.5 percent of Adjusted Gross Income (AGI) can be deducted. The threshold rises to 10 percent in 2013 for most taxpayers. For those at least age 65, the higher threshold phases in through 2016.
• The addition of new taxes that will apply to individuals earning higher incomes as part of the new Patient Protection and Affordable Care Act.

Then there are the $1.2 trillion in automatic spending cuts that will kick in, if there is not a solution to this fast approaching cliff:

• $110 billion in spending cuts agreed to in the Budget Control Act of 2011
• $26 billion from the expiration of emergency unemployment benefits
• $11 billion in reduced Medicare reimbursements for physicians
• $105 billion in other scheduled changes to revenue or spending.

(Bullet points courtesy of Hopkinton Crier)

If you listen at all to the news, they make it sound like if there is no solution reached by our glorious leaders then America will be faced with, and go back into, another recession.  Okay, fine, but quite honestly when you look at the shape that this country’s fiscal house is in, then I say forget the fiscal cliff, we need to be more concerned about the fiscal black hole.

The fiscal cliff is a mere molehill compared to the Olympus Mons sized debt that America better start paying serious attention to, sooner rather than later.  Our government has a serious spending problem, constantly spending more than it takes in in revenue (taxes).  All of that deficit spending continues to pile more and more onto our $16 trillion and growing debt, and there doesn’t seem to be any real tangible discussions on how to reduce our debt burden in anything close to a timely fashion.

To be perfectly honest what is needed to seriously address America’s soon to be crushing debt is a combination of higher taxes AND spending cuts – the exact things that will automatically happen if we fall off the fiscal cliff.

So, here we are, damned if we do, and damned if we don’t.  If our illustrious spenders in Washington DC don’t reach some kind of solution to the cliff, then we are plunged into another recession.  If we are plunged into another recession then the government will be compelled to increase its deficit spending, with the hopes of goosing the economy out of that recession, and more than likely bailout a few more companies too.  If the government increases the deficit spending, then that only compounds the bigger issue, which is looming fiscal black hole.

If however our illustrious spenders in Washington DC do figure out some kind of a solution to the fiscal cliff, then odds are there will be some kind of tax increases somewhere, or another; but spending will more than likely (I’d damn near guarantee it) not be reduced in a sizable enough fashion, which will lead towards a continuance in deficit spending, thus adding to the ginormous debt burden, and we continue towards that fiscal black hole.

It is certainly quite a pickle all of those illustrious spenders in DC have put all of us in, but most people nowadays believe that the government is some sort of magical entity, like Merlin, that can conjure up a spell that will fix everything, and cost no one anything.  Sadly though governments are more akin to the Wizard of Oz; full of bluster, stunning pyrotechnics, but absolutely zero magic.

Contrary to popular belief governments, particularly our government, does not have unlimited funds; despite having access to the monetary printing press.  Printing more money only makes the money worth less, eventually becoming worthless.  It also needs to be mentioned that there is no entity big enough to bailout America.  The European Union is there to try (thus far unsuccessfully) and bailout the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) but we are the world’s sugar daddy, meaning that if we can’t get things under control, there will be no one there to bail us out.

The unfortunate fact of the matter is that if we truly wish to get serious about the national debt, then it will require some hard choices by those who purport to represent us, and control the country.  However, since our elected officials are more concerned about getting reelected and maintaining their uber cushy seats in the ivory towers of Washington DC, then they do not wish to upset their electorate, and make those hard choices needed which could steer us away from the fiscal black hole.  I think that you can figure out what all of that means – right?

A man in debt is so far a slave.  (Ralph Waldo Emerson)