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SO WHO’S AFRAID OF THE FISCAL CLIFF?
Source:
jimbrownla.com
- Dec 13, 2012
Thursday, December 13th, 2012
Baton Rouge, Louisiana
What’s most memorable about January 1, 2000? That was the day, experts of all types warned, that the economies and businesses of world were going to disintegrate into chaos. Why? Because of something called Y2K. But something funny happened on the way to the predicted fiscal doom and gloom. Instead of accepting “inevitable” business and economic mayhem, the private sector as well as the government prepared. And after all was said and done, the turn of the century Armageddon turned out to be a non-event.
Now, according to a different batch of experts, a new day of reckoning is fast approaching. In just a few weeks, we are warned, we will be standing on the edge of the so-called “fiscal cliff.” So just what is this new financial “apocalypse,” and who allowed us to get on this track headed for economic catastrophe? It all goes back to President George W. Bush (as do so many of the problems we face today). He led both Republicans and Democrats along a no-win road that has come back to haunt both parties. Bush signed a massive round of tax cuts without having the courage to cut any federal spending to offset them. So to cover themselves, both political parties agreed to a 10-year expiration date so they could posture on fiscal soundness.
Not to be outdone, President Obama extended these tax cuts with the support of a more than willing congress. But that new extension is about to expire again. The piper must be paid. On January 1 of this coming year, your tax rate will go back up to the rate we all were paying in 2001. And congress, in their infinite wisdom, piled on a series of other cuts, along with a tax holiday and a variety of tax credits, all with the same expiration date.
Now I’m not arguing against reasonable tax cuts, and needed tax credits that bring job growth. But they come with a price tag, and that tag is called cutting what is being spent.
Neither Bush nor Obama seem to get it: there is no such thing as free lunch. Over the past 12 years, neither has offered any proposals to reduce government spending to make up for the tax goodies they continued to hand out.
What happens if the current congress just stands by and does nothing? That’s when the dreaded “sequester” kicks in. Don’t be bothered by this confusing word. It simply means that a number of pre-ordained deep spending cuts will take place. Both defense and discretional domestic spending will take big hits. The idea was to make both sides come to the table months in advance to work out priorities — what reasonable cuts could be made and which taxes that were in place before 2000 might be reinstated. After all, neither side would stand by and allow the heavy handed financial shoe to drop-right?
But neither side could perceive the intervening arrival of the Tea Party and Grover Norquist, the tax pledge villain. Norquist, who heads an organization called Americans for Tax Reform, led the “no tax pledge” effort that, whether you agree with it or not, has been highly successful. I was at a Washington seminar with him a few months ago, and he told me that he had 449 incumbents and challengers who signed the pledge in 2010, including 241 challengers and 208 incumbents. This time around, 534 have signed the pledge, including 255 challengers and 279 incumbents, he said.
So with the present stalemate in place, is it necessary to confect an immediate solution, or just prepare for the worst? Neither. Both parties seem to be enjoying all the drama that this controversy has caused. But little of the draconian damage will take place immediately. The tax increases could be considered under the new congress after the first of the year. If reduced rates are put into law in a month or so, they could all be made retroactive. Many of these changes were set up to be implemented gradually. A new congress will have plenty of time to adapt, fine tune, change or even eliminate some of the taxes before they are put into effect.
Cynics like me believe that the current crisis was designed specifically to hit right after the election by those who passed the buck to begin with. The idea was to create a climate that would create tremendous pressure on the current congress to make changes in Social Security and Medicare, causing the elderly to demand action. Crying wolf generally gets results.
But what about the psychological impact on the business sector? Most observers agree that if some action does not take place and major changes are not made, then growth will be stunted. Will an uncertain economy paralyze investments? We are talking only a few months of delay — when cooler heads can deal with this sticky problem without the current pressure. The topsy-turvy economic doldrums have been around for more than five years. A few more weeks shouldn’t cause any additional lack of economic confidence.
READ MORE:
http://www.jimbrownla.com/blog/?p=8909
Category: General Business
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