Monday, December 3, 2012
Falling Over the Fiscal Cliff
Indeed, congress moves in a mysterious way, its wonders to perform. It is a little hard to know exactly what is going on right now in Washington, amid all the posturing and finger pointing, but apparently Congress is not going to resolve the fiscal crisis until we go over the "fiscal cliff" on January 1.
The difficulty appears to be this: 95% of the Republican members of the current Congress have taken Grover Norquist's "Taxpayer Protection Pledge," in which they promised not to raise taxes. It may be an effective way to attract votes in conservative districts, but as a matter of statecraft it is reckless and irresponsible. Anyone who would sign such a pledge is unfit to hold a seat in a deliberative body such as Congress. Ronald Reagan had more sense than that, and he was in the executive branch of the government! What is likely to happen is that Congress will fail to act before the end of the year, the Bush era tax cuts will automatically expire, and then when Congress takes up the subject again in January they will be able to claim that they are cutting taxes instead of raising them!
One only has to contemplate how huge the national debt is to see how ludicrous such a pledge is. In 2009 the federal deficit was over $1.4 trillion. That year we spent $3.50 for every $2.00 we collected in revenue, and borrowed the rest. The following year the debt stood at $13.5 trillion. The government owes $44,174 for every man, woman and child in America. We paid $414 billion in interest. Yet most Republicans in Congress have committed themselves to never raising taxes. It is obvious that to control a deficit of that size more than just spending cuts will be needed.
In 2010 President Obama, after Congress failed to act on its own, appointed a bi-partisan commission to study the fiscal crisis and make recommendations. The commission, headed by Erskine Bowles and Alan K. Simpson, issued a report, but without the necessary votes to make it official. The plan would cut spending by $2 for very $1 in increased tax revenue. It assumes that the Bush era tax cuts will be extended except for those earning more that $250,000. Reimbursements to Medicare physicians would freeze and defense spending would decrease in line with current administration policy.
On the spending side, what to do about Social Security is pretty clear and obvious. To make the system solvent we need to raise the retirement age, lower cost of living adjustments, and raise the Social Security tax.
Medicare and Medicaid are far more difficult problems to solve. In the last election Vice-Presidential candidate Paul Ryan suggested turning these programs into block grants in which the federal government would provide a fixed subsidy and the states and beneficiaries would pay the rest. The problem with this approach is that it does not address the underlying causes of rising healthcare costs but simply shifts the cost to the beneficiaries instead. From the standpoint of the beneficiaries, this is no solution at all. A better approach, in our opinion, would be to change the way providers are reimbursed, including the pharmaceutical companies and medical equipment manufacturers. Tort reform should also be a part of the solution – the object here is to provide healthcare on a cost-effective basis, not enable trial-lawyers to enrich themselves at the taxpayers' expense!
Our military commitments abroad need to be reexamined. On this issue we think that many Republicans are suffering from political and fiscal schizophrenia. They say that they want smaller government and lower taxes, and yet support a huge military-industrial complex. They seem unable to come to grips with the fact that wars cost money – lots of money. The United States currently spends more money on defense than the next 24 countries combined.
Here is something for American conservatives to think about: George Washington, himself a man of some military experience, warned us against entangling foreign alliances, and if there was one thing that the Founding Fathers dreaded, it was a large standing army in times of peace. Moreover, counter-insurgency campaigns in foreign countries almost never make any sense either militarily, politically, or morally (I speak as a Vietnam veteran). Nations that have aspired to imperial domination have generally had to resort to confiscatory taxation in order to maintain the necessary military strength. That is a very different vision of government from that contemplated by our Founding Fathers. We cannot be both Thomas Jefferson and Julius Caesar at the same time. If we wish to return to Jefferson's vision for America, Caesar must go. We might then find it easier to balance the budget.
As far as tax reform goes, the idea of eliminating credits and deductions, the so-called "tax expenditures," is certainly in order. One that is bound to be controversial is the mortgage interest deduction, which frankly benefits wealthy homeowners over everyone else. We should also look at the Earned Income Tax Credit, something from which I personally have benefited, but it is hard to justify from a budgetary standpoint. It is a blatant giveaway at a time when the government doesn't have any money to give away.
One interesting aspect of the tax code that came to light in the last election was the fact that "passive income" is taxed at only a 15% marginal rate. This means that Mitt Romney, whose income is mostly derived from investments, was taxed at an effective rate less than that of President Obama, who arguably has the most difficult and most important job in the world. Why? Wouldn't it be fairer to tax all categories of personal income at the same rates?
Your comments are welcome. This is a serious issue in urgent need of discussion, and what better place to do it than around the great kitchen table of the blogosphere? Let your opinions be known!
You may also enjoy ( or dread, as the case may be!):
The Path Ahead
The Social Agenda of the Tea Party