Wednesday, December 5, 2012

The fiscal cliff

The fiscal cliff – expiration of the Bush era tax cuts, across the board significant reductions in federal spending in the absence of a balanced budget, and hitting the federal debt ceiling – looms nearer daily. Most economists, politicians, and pundits fear that the nation falling over that fiscal cliff will plunge the U.S. back into recession. To avoid the fiscal cliff, Congress and the President must find steps on which they can reach mutual agreement.

Falling over the fiscal cliff will be terrible for some of the most vulnerable people in the United States. For example, unemployment benefits will abruptly end for many long-term unemployed Americans. Many Department of Defense contractors will experience sharp contract curtailments, probably resulting in at least temporary layoffs for employees.

Some consequences, although significant, will have more gradual adverse consequences. Low and middle-income workers will find less money in their paychecks, as larger sums are withheld when income tax rates increase. Predictions of these workers losing $400 to $2000 per year represent $8 to $40 cuts in weekly income. For people who live paycheck to paycheck, even such modest amounts may mean the difference between solvency and bankruptcy.

Still other consequences are hard to predict. Investors often factor bad news into security prices before the bad event actually occurs. Pundits disagree over whether the market has anticipated falling off the fiscal cliff. Holders of U.S. national debt (treasury bills, notes, and bonds) may similarly anticipate the fiscal cliff – or perhaps not.

Nevertheless, several consequences of the nation going over the fiscal cliff are neutral or even positive:

·         Falling off the cliff will have little effect on the lifestyles or sustainability of those lifestyles among the nation’s wealthiest 2%.

·         Raising tax rates will produce more income, reducing an outsized federal deficit.

·         Sequestration will not only help to reduce the deficit but also cut a bloated Department of Defense budget and force other departments of the federal government to be better stewards of federal tax dollars.

Furthermore, going over the fiscal cliff will put the President and his Congressional allies in the position of forcing their Congressional opponents either to vote against a tax cut for 98% of all Americans or to accept higher tax rates on the top 2% of earners. (Incidentally, only 2.5% of small business owners are in that 2%; raising taxes on them and others seems unlikely to stop small businesses from creating new jobs.)

Much of the fiscal cliff debate rhetoric is rubbish and morally wrong. For example, an acquaintance has told me that if the nation goes over the fiscal cliff, then all estates, regardless of size, will be subject to a confiscatory federal estate tax of 55%. The truth is that if the nation goes over the fiscal cliff that estates worth more than $1 million that do not pass to a spouse will be subject to the federal estate tax. As I have previously argued on Ethical Musings, the estate tax is important for ethical reasons (cf. Taxation and Job Creation and Some thoughts about inheritances).

My feelings about the fiscal cliff are deeply conflicted. On the one hand, I am concerned about the well-being of the most vulnerable, and many of them are certain to suffer if the nation goes over the fiscal cliff. On the other hand, I am far from sanguine about the likelihood of the nation’s political leadership raising taxes on those most able to pay, taking constructive and sizable steps to simplify the tax code (to increase compliance through making filing easier, eliminating the plethora of special treatments that various groups now enjoy), and stopping unnecessary government spending.

What would Jesus do? Jesus would certainly contact his elected representatives and the President, encouraging them to focus on government’s responsibility to meet the needs of the most vulnerable. I think he would also emphasize to the importance of the nation exercising fiscal responsibility (i.e., a balanced budget); without fiscal health, life will become, probably quicker rather than later, much more painful for all people in the U.S.

Finally, I also believe that Jesus would be a complete pacifist or, if not, advocate relying on lethal force only as a last resort. Instead of cloaking defense and homeland security in red, white, and blue colored rhetoric that most politicians are fearful of challenging, the nation should ask itself what threats it faces and the lowest cost, ethical means of protection against those threats. Spending more on defense than the next 20 nations (ranked by size of defense spending) combined spend on defense is wasteful and immoral. If the U.S. does not go over the fiscal cliff, I’m unsure what will break the unholy alliance of military, industry, and Congress (to learn more about these relationships, I recommend Nick Turse’s 2008 book, The Complex).

By way of illustration, this week I read that the Department of Defense’s largest intelligence agency, the Defense Intelligence Agency (DIA), was expanding and would soon rival the Central Intelligence Agency (CIA) in size. A majority of DIA agents will be civilians; the rationale is that the DIA will emphasize military related intelligence more than the CIA does. That begs the question of why the CIA cannot hire personnel who specialize in military intelligence. Assuredly, the nation does not need two separate intelligence agencies, each with its own administrative overhead. Sadly, concern over sequestration in the media and among politicians has focused more on prospective cuts to defense than for any other purpose or to any other agency.

1 comment:

Ted said...

We should have gone over the cliff. All we do is put off today what will be bad news tomorrow and it will get worse. As a country, we need to understand the consequences of all our actions in domestic and foreign adventures. Everything takes on a rosy appearance with no thought on future effects. We try to help too many people who for some reason, either our fault or their own, have put them in situations that are not going to help. All we ever consider is give more money and “help”.
Yes being the bad guy is tough; but we need someone or group to tell “US” to face the facts. Most of us will not have the opportunity to reap the future downfall left for our grand kids.
Increase the tax on the wealthy, then all they need is more deductions or higher pay and benefits to offset the reduction.