Fiscal Cliff Game of Chicken Nears End

by John M. Curtis
(310) 204-8700

Copyright Dec.18, 2012
All Rights Reserved.                                         

           Speeding rapidly toward an economic Niagara Falls, House Speaker John Boehner (R-Ohio) threw President Obama a bone, agreeing to raise taxes on incomes over $1 million a year.  Taxing such a small percent won’t make enough a dent in the $1.1 trillion federal budget deficit.  While hitting an all-time record of $1.4 trillion in 2009, the deficit has shrunk steadily since the economy started rebounding in March 2010.  Since then, the economy has added over 5.5 million jobs, adding to the coffers of the U.S. Treasury.  With the “fiscal cliff” looming, lawmakers should reconsider the expected $600 billion in budget and spending cuts slated for Jan. 1, 2013, when Bush-era tax cuts are due to expire.  When the Budget Control Act or Deficit Reduction Act was enacted Aug. 2, 2011, it mandated automatic government spending cuts and tax hikes to reduce what looked like runaway deficits.

             When S&P downgraded U.S. credit Aug. 5, 2011, it sent exactly the wrong message to the Congress.  Congress—especially Republicans—believed it had an urgent mandate to slash government spending, despite dramatic improvement in the fraction of the deficit relative to the nation’s Gross Domestic Product.  As unemployment dropped from its peak in 2009 to its current level at 7.7%, federal budget deficits shrank to its current level of under $1.1 trillion.  While President Barack Obama has locked horns with Boehner on taxes, the president should rethink the necessity of hiking taxes on couples earning over $250,000.  Boehner’s concession to raise taxes on earners over $1 million isn’t too far off the mark when you consider today’s trends.  Barack should consider upping his $250,000 income limit to $500,000 and exempt small business from tax hikes with one-or-more employees.

             If unemployment continues to drop as indicated by the Federal Reserve Board, the nation’s budget deficits should be zeroed out by 2015, the exact time Fed Chairman Ben S. Bernanke plans to raise interest rates.  Through the “fiscal cliff” negotiations, Obama has insisted to ending Bush-era tax cuts on the top 2 percent of income earners.  Given the improving economy, Obama should listen carefully to Boehner and consider changing that to the top one percent.  “He is not willing to accept a deal that doesn’t ask enough of the very wealthiest in taxes and instead shifts the burden to the middle class and seniors,” said White House spokesman Jay Carney.  White House officials haven’t caught up with improvements in the jobs picture, currently reducing federal budget deficits.  While Boehner’s “Plan B” doesn’t quite get there, perhaps a “Plan C” hiking taxes on earners above $500,000 would be appropriate.

             Instead of buying former GOP nominee Mitt Romney’s dire economic forecasts, the White House should get with the times and realize that less tax hikes are needed to fulfill the Budget Control Act’s mandates.  Boehner and the GOP House need to stop using the “fiscal cliff” discussions to litigate what they couldn’t achieve on Nov. 6:  Entitlement reform.  Voters rejected Mitt and his running mate Rep. Paul Ryan’s (R-Wis.) plan to slash government spending, especially the federal workforce.  If the White House really wants to protect the middle class, they need to expand their definition of the middle class or make exceptions for self-employed entrepreneurs.  “The speaker’s “Plan B” approach doesn’t meet this test because it can’t pass the Senate . . . “ said Carney, forgetting that the deficit picture has changed dramatically since the dark days of 2009 when the U.S. economy bottomed out.

             If Barack gets his way, it’s conceivable the government would run surpluses much like it did during the last part of the Clinton years.  While that seems desirable at the moment, it wouldn’t take long for the government to generate too much tax revenue..  Whatever compromise emerges on the “fiscal cliff,” it shouldn’t punish taxpayers any more than necessary to run government.  Republicans and Democrats on the Joint Select Committee need to switch gears with the improving economy.  Boehner’s “Plan B” is closer to the reality of solving the nation’s budget deficits than Obama’s plan to hike taxes on the top 2% or earners over $250,000.  With Christmas and New Year’s approaching next week, lawmakers want to get out of Dodge.  All indications point toward a deal that could spark a furious year-end Wall Street rally, reducing federal budget deficits even further.

             Obama and Boehner need to get the deal done before heading out of the Beltway.  More economic data indicates that both sides need to meet halfway, with neither side getting it right.  While anything’s possible in the New Year, all signs point to more economic growth, unless the President and House Speaker can’t put partisan differences aside for the good of the country.  With the nation still grieving over the senseless massacre in Newtown, Conn., the time is ripe for Democrats and Republicans to get on the same page.  Given improvements in the employment picture, the original budget-slashing plans of the Deficit Reduction Act should mirror actual changes in the nation’s revenue picture.  Both Parties aren’t right about dealing with federal budget deficits.  Both sides need to stop partisan wrangling, meet halfway and get the job done for the U.S. economy.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.