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Everyone
today is talking about the "Fiscal Cliff". It is a small decrease in
spending combined with a significant tax increase. Let's put this in
perspective. The budget for fiscal year 2012 was $3.8 trillion and the
deficit (shortfall which had to borrowed) was $1.1
billion. If no deal is reached, and we go "over the cliff", then
spending will be automatically cut by $110B. This is less than 3% of the
total budget and 10% of the deficit.
Let that sink
in. The government would still borrow about a trillion dollars a year. The
debt would rise to $20 trillion by 2016. This is not much of a solution.
To make the
math easier, think of it in terms of a family budget. The total salary of the
parents is $38,000 but spending is $49,000; the family borrows $11,000 every
year. Now they propose to address the problem by spending $47,900, a reduction
of $1,100. The kids would probably be screaming about cuts to their
allowance.
In addition
to a small cut in spending, if we go over "the cliff", there will
be increases in many taxes, some of them not so small. The income threshold
for a taxpayer to be forced into the Alternative Minimum Tax falls back down
to the 2000 level. Under AMT rules, most deductions are not allowed. Even
without an increase in tax rates, there can be a large increase in the tax
bill.
One tax rate
increase is that the capital gains tax rises by 33%. Many supporters don't
realize that investors have a choice whether or not to take risk, especially
in startup companies. Most startup investments are a total loss to investors.
The few that produce big gains must pay for all of the others plus enough
profit to make it worthwhile. The higher the tax, the fewer startups justify
an investment and the more investors will ignore startups altogether.
How did we
get to the point where a token effort to slow the rate of ascent of the skyrocketing
public debt is regarded as falling off a cliff? Why do so many people want to
increase taxes on investors and entrepreneurs, and ignore that this will hurt
the economy, reduce jobs, and hit their pension fund or 401k?
A very large
part of the economy exists only because of government spending. This is not
just food stamps, corporate subsidies, and bailouts for big banks. It also
includes government-guaranteed loans for students and homebuyers. It includes
Social Security and pensions that are provided or guaranteed by the
government. And it includes many other things; from Medicare and other
healthcare (even pre-Obamacare) to bridges and
roads, to water, sewer, and power. It would be hard to think of many sectors
of the economy that did not have any government subsidies.
To some
people, every problem has a simple answer: more government spending. To
others, the government must cut "waste", but not "vital
programs". It is obvious what they mean by "vital"--programs
from which they benefit. While most people seem to agree on cutting spending,
they cannot agree on any actual, specific cuts.
They are
Fiscal Deniers. They deny two facts. First, they deny that the economy has
become dependent on government spending. Business would fail and people would
lose their jobs if the government stopped spending.
Second, they
deny that government spending has become dependent on borrowing. If the
government could only spend its tax revenues, it would have to drastically
cut spending.
Fiscal
Deniers prefer not to acknowledge these two facts. But reality will have its
final revenge. If we don't cut spending voluntarily now, then sooner or later
the US will run into a brick wall. To paraphrase Margaret Thatcher, we will
run out of other peoples' money. When that happens, it will be a nightmare
that makes the "fiscal cliff" look like a pleasant dream.
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