Select Page

Fiscal Cliff Notes: How We Got Here & Where Do We Go?


For those of you who have asked, I have produced an outline of my recent talk on the Fiscal Cliff: How We Got Here & Where Do We Go? This is a handy cheat sheet that outlines the problems that contributed to our current situation and what we can do to make long-lasting, systemic changes.

A. How Did We Get Here?

1. Spending
a) Spending up estimated 27% since 2008 (cite: Forbes)
b) Trillion dollar deficits each year since 2009 (cite: OMB)
c) Debt-GDP ratio up from just over half of GDP in 2009 to nearly three-fourths in 2012. (cite: Heritage)

2. Taxes
a) Bush “tax cuts”
b) Uncertainty with tax rates
c) New taxes slated for 2013

3. Entitlements
a) Social Security
b) Medicare/Medicaid
c) Food Stamps
d) Disability

4. Healthcare
a) Cost of Obamacare – $1.93 Trillion in first decade (cite: Weekly Standard)
b) Taxes associated with Obamacare
1. Health Insurers Tax
2. Surtax on Investment Income: (3.8%)
3. Health care deduction AGI haircut (from 7.5% – to 10%)
4. Hike in Medicare Payroll Tax: (.9%)
5. Medical Excise Tax

5. Regulations
a) Code of Federal Regulations has increased by 11,327 pages — a 7.4% increase since 2009
b) Examples
1. EPA
2. FDA
3. NRLB
4. IRS

B. Where Do We Go?

1. Cut Spending
a) First, go back to FY2008 spending levels
b) Cut Federal Workforce by at least 10%, which should be commensurate with spending cuts
c) Enact Spending Caps to 19%-20%

2. Tax Reform
a) Make “Bush Tax Cuts” Permanent
b) Lower corporate rate and all tax margins
c) Simplify the tax code
d) Eliminate AMT

3. Entitlement Reform
a) Social Security
1) Raise the retirement age
2) Privatization options
3) Change from current to straight inflation increase
b) Food Stamps/Disability Overhaul
1) Fraud and abuse
2) Stricter guidelines

4. Healthcare Reform
a) Repeal Obamacare
b) Tort Reform
c) Create system more like HSA

5. Regulation Reform
a) Repeal strangling regulations – is this possible?

A Primer on the Fiscal Cliff

Recently I gave a talk on the Fiscal Cliff — how we got here and where we are going. Since several people have asked, I posted the videos from the talk. For whatever reason, the last 2 minutes ended up a second separate video, but you can view them one after the other. Enjoy!

Fiscal Cliff, Part I

Fiscal Cliff, Part II (ending)

Pondering the Fiscal Cliff Numbers


Consider this: if we go over the fiscal cliff, about $600 Billion will be taken out of the economy in a combination of tax increases and lower spending. This is certain to put a stranglehold on an already weak economy. Obama has had trillion dollar deficits each year of his presidency — the highest deficits of all the presidents in history. Even by reducing the deficit to about $500 Billion by the automatic fiscal cliff triggers, Obama would still be responsible for a deficit that is larger than all of his predecessors. Clearly, spending is at the heart of the problem.

The Democrat’s Middle Class Lie: The AMT


The Democrats have continuously claimed that they are looking out for America’s middle class by keeping the tax rates the same for them while seeking to raise rates on the top 2% who need to “pay their fair share”. The spotlight has been on this point of contention in the fiscal cliff negotiations, thereby serving to deflect attention away from the one policy that 1) is already the mechanism for ensuring that the wealthiest pay more and 2) will raise rates on the middle class for certain if the fiscal cliff has not been resolved. What is it? The AMT.

The Alternative Minimum Tax (AMT) currently serves virtually no useful purpose, other than the raising of an ever-increasing amount of tax revenue. The AMT was instituted in its present form when the prior “add on” Minimum Tax was transformed into the AMT in the early 1980’s. Its stated purpose was to require that all taxpayers paid at least a “fair share of tax”. Yet it has become very clear in recent years that this AMT tax revenue is not coming from just the taxpayers who were the intended targets of this tax – and 28 million additional taxpayers will now be impacted if the method by which it is calculated is not fixed by the end of the year.

The AMT was developed to identify“loophole” type deductions, also known as “preferences”. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. Whichever of the taxes is higher is the one the taxpayer must pay.

However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law abusers), the law that was passed included items that were not loopholes at all. A convoluted formula is used to calculate and compare the differences between income and deductions in order to determine who falls under the guidelines. Interestingly, a very substantial majority of all current AMT paid by taxpayers results from the following factors: 1) treating state and local taxes as a preference; 2) treating miscellaneous deductions as a preference; 3) allowing lower exemptions than the regular tax.

These factors have flaws. For instance, state and local taxes are hardly a loophole because taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Likewise, “Miscellaneous Deductions” is the category of deductions that consists primarily of expenses incurred to earn income. It often includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction necessary to have a truly fair income tax system and should not be considered a loophole. Furthermore, the exemption available under the AMT is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation; it is also phased out entirely over certain income levels.

The indexing brings us back around to the problem at hand. Each year, Congress has to approve an annual “patch” which raises the threshold for inflation in order to raise the exemption limits of the tax — so that less wealthy taxpayers won’t be subject to the AMT. During AMT discussions, Congress likes to posture and point to the patch as some major revenue loss (had the AMT been applied to those families) as an excuse to raise to raise taxes in order to offset this “potential missing tax revenue”. It’s all song-and-dance really. Congress always approves the patch; the yearly patching process itself, however, is poor government. We are learning this lesson the hard way as a quiet showdown is unfolding during negotiations.

The AMT presents a dire situation with the fiscal cliff right now. If the patch isn’t approved by the end of December 31, the AMT will reset and taxes will go up for millions. If we go off the fiscal cliff, the Democrats will be directly complicit in a massive tax increase on millions of middle-income taxpayers’ families – the opposite of what they have been claiming in their bid to raise taxes on the most wealthy.

How could this occur – unless the Democrats really do prefer to let the patch lapse…and hope they can pin the discussion failures on the Republicans. After all, if more citizens pay the AMT, more revenue is raised for the rapacious government. Is it all part of a grander scheme, perhaps? What we do know for certain is this: the Democrats have shown that their narrative of protecting the middle class is a lie and empty rhetoric. They would risk sacrificing the tax rates of 28 million taxpayers for the sake of ideology and the job creators (the top 2%).

Thinking of Thomas Paine

These are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives every thing its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as freedom should not be highly rated.

– Thomas Paine: “The Crisis”, December 23, 1776

A Case For Cutting the Corporate Tax Rate


Alan Reynolds over at CATO published a nice piece at National Review Online (NRO). He adeptly points out the fallacy of Obama’s claim that raising taxes on the top 2% will raise a princely sum of revenue to put toward our skyrocketing deficit.

The Treasury Department calculated that

raising the top two personal-income-tax rates — to 36 from 33 percent and to 39.6 from 35 percent on incomes above $250,000 and $377,000, respectively — would raise just $23.1 billion in 2013, barely enough to finance federal spending for two days.

How is this supposed to be a solution? It’s not, but it’s the stuff of which good rhetoric and sound bytes are made. Making the rich “pay their fair share” puts the onus on the wealthy — someone other than the average taxpayer — as a red herring to the hide the fact that our deficit problem is so large, a tax increase isn’t going to make a dent. But the Democrats can’t admit that their tax-and-spend mentality is falling apart.

Yet the real interesting part of the article starts halfway in. Reynolds goes on to make the case for cutting the corporate tax rate, an important point raised in the Simpson-Bowles package that has been all but forgotten. We are reminded that both Obama and Romney have suggested lowering the rates in the past, which are among the highest in first-world countries at 35%. Cutting the rates would be stimulative, as more money becomes readily available to businesses which have been struggling in this economy. It would also serve to entice businesses to relocate here, instead of our businesses continuously seeking lower tax rates outside the US (as they are now). We desperately need the economy to grow — to grow our way out of this slump, instead of trying to tax our way out of it (and putting ourselves back into a recession). Reynolds notes,

the positive impact on business investment, and on multinational decisions to locate new businesses in the U.S. rather than abroad, would be swift and powerful. There is nothing to lose from cutting the corporate tax rate, not even revenue, and the economic gains are likely to be quite astonishing.

Let’s hope for some real tax relief out of the fiscal cliff negotiations. Besides allowing the current tax rates to stay in place — perhaps permanently — so that we can stop being in a state of economic uncertainty, cutting corporate taxes should be a key item on the table.

Sequestration Was Supposed to Be A Placeholder

During the 2011 Fiscal Cliff discussions (which lead to the Super Committee), sequestration was part of the comprehensive deal about revenue — but only in a limited way. At that point in the conversation, the conversation was how much to cut spending.

It was Congress’s idea (and Obama went with it) — to use sequestration as a stop-gap. Sequestration’s only purpose was to provide a number and use it to be a placeholder until they determined what exactly would get cut. They were not really going to cut 600B out of the military, but they’d cut here and here and THEN decide where to place major cuts that would total the $600 Billion.

Forget 12/21: Today, We are 1331 Days Without a Budget


Time for another milestone. I noted it when it was 1,000 days past, but today we are now 1331 days without a budget. Nevermind all the doomsday talk for tomorrow — our fiscal situation is dire now.

April 29, 2009 is the last time Congress passed a budget. Obama’s two budgets proposals failed 0-97 in the Senate, and 0-414 in the House. No Democrats would vote for, or even sponsor, his proposals.

Right now we are about: $16,370,000,000,000 in debt. But that is not the whole picture. It doesn’t include entitlement debt, which makes the situation more egregious.

And what about the fiscal cliff? Harry Reid has decided to send Congress home for Christmas and reconvene on December 27th, and rules out a vote on Boehner’s “Plan B”. On the contrary, Eric Cantor has said the House has the votes for “Plan B”. “Plan B” raises taxes for taxpayers above $1 million, while the Senate version is a much lower, $250,000 threshold. More discussions, but no answers. We continue on in a state of uncertainty.

Yesterday, I wrote out a primer which showed all government debt, spending, and fiscal cliff solutions scaled down to manageable numbers. If you were to reduce equally everything by $10 million, you can understand the figures in amounts we are use to.

For instance:

Total Current Financial Picture for a Family of Three, on a $25,000 income
Annual Revenue: $25,000
Annual Spending: $38,000
Annual Expenses/Deficit per year: $13,000
Current Government “Shadow” Debt: $156,000 (ie. think – like your mortgage & credit cards)
Promised Future Entitlement Debt (SS and Medicare): $603,000
Total Family Debt on a $25,000 Income = $759,000 + $13,000 in annual added deficits
Debt “Fiscal Cliff” Solutions:
Obama’s Plan: cuts a mere $812 a year for 10 years and adds $1242 in revenue
Boehner’s Plan: cuts a mere $955 a year for 10 years and adds $955 in revenue.

You can read more here to see the breakdown and all calculations.

With 11 days out before the fiscal cliff deadline and no solution in sight, you can be sure the “no-budget clock” will also continue ticking. 1331 days…and counting.