Facing the Fiscal Cliff Solves 77% of the Deficit Problem in One Move

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With the election over, Wall Street is now obsessing over the possibility that the "fiscal cliff" negotiations may end in stalemate.

Well I have news for them: a stalemate would be good for the U.S. economy, and any deal that does not preserve most of the fiscal cliff is not worth having.

Here's why.

By ending Social Security tax relief, the Bush tax cuts and cutting spending on both defense and domestic programs, the "fiscal cliff" cuts a deficit projected by the Congressional Budget Office (CBO) at $10 trillion over the next 10 years down to $2.3 trillion.

Contrary to all of the media caterwauling, that's not a dreadful fate.

In fact, it is exactly what we ought to be doing, since it solves 77% of the deficit problem in one fell swoop.

Of course, lovers of low taxes (which includes me) will claim that we should not support the "fiscal cliff" because it will raise taxes on everybody. But honestly, what's the alternative?

The reality is that President Barack Obama won the election and that he passionately wants to raise taxes on the rich. It's more important to him than any other outcome from this negotiation.

In setting out his objectives he twice reiterated that he was non-negotiable on tax hikes for the rich, and wanted to close the budget gap primarily by tax increases.

And guess what: Tax increases in budget negotiations are much more real than spending cuts, because once the legislation is written, they always happen, whereas politicians often find a way to weasel out of a spending cut deal once the klieg lights are off.

Thus, given the Republicans' weak negotiating position, it's likely we'll end up with the tax increases on the rich anyway.

However, tax increases alone will do little to reduce the deficit.

That will leave the deficit as a real problem, and may well produce yet more tax increases on the rich as a precondition to solving it. To increase taxes on the rich, even modestly, without solving the deficit problem seems a very bad idea indeed.

A Fiscal Cliff Reality Check

The worst outcome of the negotiations would be four more years of trillion dollar deficits.

That would push the federal debt to around 150% of GDP, making it a gigantic problem for the next president in 2017.

In addition, when combined with Fed chairman Ben Bernanke's easy money policies, it would drain away the U.S. capital base still further, as the country runs huge balances of payments deficits and sells huge amounts of Treasury securities to foreigners.

By 2017, the U.S. would be a much poorer country, with high unemployment and a huge recession to come, probably accompanied by a financial crisis.

Obama, out of office in January 2017, may not care about this, but the rest of us should.

If tax increases are required, it's better to impose them on everybody. U.S. voters have effectively been running up the national credit card bill in the last four years, even while trimming their own credit card balances. Middle-income voters must be taught that they cannot simply vote to expand government ad infinitum and not pay for it.

By enduring the fiscal cliff tax increases, the public will finance its spending wishes on a pay-as-you-go basis (or closer to it), keeping the country's debt position under control.

The tax increases will also lessen consumption, thereby reducing the balance of payments deficit and our dependence on foreigners.

The Republicans in Congress cannot get tax cuts, but they do have the ability to stop massive new spending programs. If they hadn't that ability, I would not favor the fiscal cliff; there's no point raising more money through taxes if the feckless administration is only going to spend it on new rubbish.

But with spending controlled, the extra money raised will go to improving America's fiscal and debt positions, as it should.

The Fiscal Cliff Comes With Pain

Admittedly, the fiscal cliff does include some painful changes.

The rate of estate taxes goes back up to 55% as the limit falls to $1 million. Dividends will also become fully double-taxed again. But those things can be changed in a later negotiation, when the Republicans can put limits on tax deductions for housing, health insurance, charities and state and local taxes, all of which (if only limited, not eliminated) affect mainly upper-income voters.

Making dividends tax deductible for corporations (and keeping full tax for investors) would be the ideal corporate tax reform, because it would eliminate most corporate tax loopholes and force management to pay most earnings out to shareholders. But this negotiation could be done in a revenue-neutral way, since the deficit problem would be more or less solved.

Of course, people worry that the fiscal cliff would cause a recession, but why is that a problem?

We're bound to have another recession before 2017 anyway, so the Democrats should want to get it over with.

For Republicans, a mild fiscal cliff recession, without an accompanying financial crisis, is a price well worth paying to solve the deficit problem. It will also provide a "learning experience" for the electorate on how government overspending damages the economy.

The slogan for 2013 is simple: No more free lunches!

You just can't kick the can forever. Now is the time to deal with the fiscal cliff.

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  1. Jim | November 15, 2012

    Reduce or take all govt dept and agency budgets—including the WH and congressional budgets–back to their 2008 amounts.

  2. Bruce L. Davies | November 15, 2012

    77% of the current balance can be mitigated. However the real indebtedness is far greater. GOOGLE 222 Trillion & note the real debt facing America. The $222T includes unfunded liabilities such as SS & pensions. These are liabilities based on the Ponzi school of economics. Since Ponzi schemes are illegal everywhere but government, it is time to own up to the reality that it is also illegal & immoral for such schemes in government itself. By declaring & legislating them illegal, those programs will need to change from "DEFINED" payouts to "CONTRIBUTORY" payouts. Immediately, the $222T is reduced to a more manageable number, the yearly outlays will become more in balance and the mindset will begin to change. We really do need to control our spending. The fact is that America's "WEALTH" has been predicated on debt (borrowing 40% of each dollar spent) not wealth production. Eventually the piper demands payment. What will China, demand? I will bet it will not be in America's favor.

  3. Marc de Piolenc | November 15, 2012

    "However, tax increases alone will do little to reduce the deficit. "

    Correction: they will do nothing. What they will do is finish off an already moribund economy and plunge us into a depression that will take years to climb out of, and during that time – guess what? Tax revenue will DROP.

  4. Cath | November 15, 2012

    I appreciate and agree with your ideas. However I am afraid that in the quest for "no pain" this can will truly be kicked down the road as others have suggested.

    Thank you for your insights and wisdom.

  5. Big Burly | November 15, 2012

    I say let's get an email and post card barrage of Repub congressionals and get this implemented ASAP.

    We need to determine once and for all whether human nature is best described by Keynes and Marx, or the Austrian School and Aristotle.

    The poor will suffer for a while — we all will recover. The special interest ties to the US Treasury by big business, big labor, and big government will all be on the table for elimination in a meltdown. Time for main street interests to take center stage.

    The hubris of the socialist / collectivist / redistribute the wealth mantras needs to be discredited once and forever.

  6. Martin Poad | November 15, 2012

    Obama always says that he wants the wealthy "to pay just a little bit more", but I have never heard him say what he thinks a little bit more means. Does anyone know what this means?

    • John Lathuras | November 15, 2012

      I think he has actually, at least in terms of income taxes, where he has stated he wants a return to the Clinton era tax rates.

  7. Linda Nagy | November 15, 2012

    My feelings exactly!

  8. Money May | November 15, 2012

    Very well put Martin. I'm wondering why Congress can't figure this out with all the "experts" they have assisting them. I'm a young man and work for the federal government but if it means me sacrificing pay increases or what have you I'm willing to do it for the future of my beloved country. Nothing comes with out sacrifice and it appears a lot of people have forgotten this. No strike against you, but too many in your generation have spent freely and passed the buck down to my generation. I'm sick of it.

  9. Melia Sese | November 15, 2012

    Utterly wrong on so many levels. It's time that deficit terrorists like Hutchinson learn about how real economies work under fiat currencies and the sectoral balances.

  10. Werner | November 15, 2012

    As a non-resident non-US citizen I have not got any real say about this. However, sheer common sense implies approving what Martin lays out here. The US has overdrawn its money printing possibilities and has got to get down to earth and stop overspending. It wont be nice for anyone, but like it or not, austerity will be the sole issue.

    • robert | November 15, 2012

      Not true. Austerity enriches the rich and further impoverishes the poor.
      When recessions hit, the prices fall and those with money can buy up real assets at fire sale prices, while people of modest means are forced to sell assets on the cheap to survive.
      It will be nice for the rich, as always.

  11. Ronald Sarson | November 15, 2012

    Although it won't happen under this administration, the real answer to raising taxes is to have EVERYBODY pay some taxes. That way everybody will realize where the money comes from, and that the tax system is not just a place where from which they get their welfare checks. It is almost criminal, and it would seem to be unconstitutional, for 40% not to pay any federal income taxes, and a large percentage of those actually drawing money out instead of paying. I don't like tax increases in general because overspending is the real problem, but if they must be raised to help a national problem, make it be for everybody. We are all in this together. Let the ones most responsible for collecting the largess contribute to helping the nation survive. Otherwise they will end up with nothing.

  12. J | November 15, 2012

    You asked…What's the alternative? I will tell you….

    Pass the Fair Tax… the national retail sales tax… and eliminate the income tax… a lot of other taxes…. AND the IRS. At a 23% rate, it has been established by millions of dollars of research, we would raise the same amount of money as we presently raise. You get to keep ALL of your paycheck and jobs would come rushing back into this country.

    Of course, in the process, you transfer a lot of the power from professional politicians and special interests in Washington back to the people where it belongs. A taxpayer gets to choose how much federal government he wants by how much he spends at retail. Go to fairtax.org The bill has been introduced in the House and the Senate but you don't hear much about it from the mainstream media.

    Some people say, "You'll never get it done!" I still like to think that, if the people really want it, it will happen. We just must get the word out that there is an alternative solution to our problems>>>>>

  13. Peggy Hoffer | November 15, 2012

    "… Middle-income voters must be taught that they cannot simply vote to expand government ad infinitum and not pay for it. …"

    What evidence is there to support this statement? I probably would have said no-income or low-income voters… And then there's enough high-income (Hollywood) voters who supported Obama. Why pick on middle-income voters? I voted for less government and I'm a middle-income voter. I don't think I need to be "taught" a dang thing.

  14. Ben Contreras | November 15, 2012

    I agree that we should let the tax cuts end. Next step is do not allow increases in spending and look for cuts. We are being double tongued if we accept social security payments and not allow payments into the system. The Republicans should accept it with conditions to fix Social Security and Medicare and get non contributors out of both programs.

  15. Rafi Aziz | November 15, 2012

    I wish these articles were written for the benefit of the leaders like Bush and Reagan and NOT the electorate, who lose control of the Congress and the Presidents after every elction. In modern history, President Obama is the only one re-elected on a "raise the Taxes" platform. The elctorate in general is mature and knows its responsibility. It is time the special interest groups reflect on the state of the economy. Who listened to people who were pointing to the perils of two simultaneous wars and risks to the economy? Who listened to the academics opposed to the Greenspan policy of financial institutions' self- regulation? We have a history of drowning out sanity in rhetoric.
    In a nutshell, if somebody needs lecturing, it is the "myopic" leadership and their special interest backers. It is the corporate PACS funding the elections on Issues of "religeous faith" and "national Pride" and "read my lips" on no more taxes. Where do you think the money for Wars would have come from? Why is the US the largest defense spender by far?
    I strongly believe that this Arithmatic is still wrong. Sane way is to cut defense spending to a rational leve, cut a lot of subsidies, reduce spending by eliminating fraud in every aspect of Government spending. This includes Medicare and Medicaid and defense. Somebody tell me how many "Intelligence Officers" are there is Washington and how much are they paid out of tax payers' money every year? For doing what? It is not the poor middle or the lower class needing medical attention or two meals a day that needs to be stopped.
    Providing real jobs with skills to 23 million people will not happen automatically. There is got to be some infrastructure apending by the Govt for a a while, so Tax base can also expand.
    The pain of cuts will fall on the ones who are already suffering. You may see it on every intersection now in my city.

    • Jim M | December 1, 2012

      Well said Rafi! Where were all these "fiscal conservatives" when Geo Bush and pals were running up the tab with two wars that were off the books and relaxed regulations allowing Wall Streeters to create their own rules (we saw how well that worked). When Geo Bush was making the case for lowering taxes in the early 2000's his simplistic rationale was since the country was experiencing annual surpluses (thank you Bill Clinton!) taxpayers must be overpaying and it is only fair to reduce taxes – particularly on those paying the most. And anyway – we can set a 10 year sunset provision on this and see how it works. Fast forward 12 years and it didn't work very well – for a number of reasons – not just taxes alone. But why not apply Bush's logic now (did I just write that??) and say since we are experiencing budget deficits its time for everybody, and particularly who can most afford it, to pay more taxes? Let's return to the model that was working under Clinton and go back to the Clinton era tax rates. Is 3% more in taxes really asking a lot? Look there are no easy answers here and no one action, such as raising taxes will get it done, but we need to start somewhere.

      • thomas | January 6, 2013

        can i get my dollars back to what they were worth when the clinton era was here,too?

  16. hangemhi | November 15, 2012

    Cutting the deficit in a way that destroys the economy DOES NOT REDUCE THE DEFICIT. Unemployment will go back up sending automatic stablizers skyrocketing again.

    When the balance sheets of the private sector are healthy enough to take on debt again the need for deficits will reside, employment will go up, automatic stablizers will go down, and these ridiculous 10 year projections of debt/deficits that don't factor in a healing economy will never materialize. Keynes has not been debunked, but completely misunderstood by those who have no understanding of the roll private sector debt plays in our economy

  17. Curtis | November 15, 2012

    Tax increases are unnecessary and non productive, what is needed is to divide this monster government by five top to bottom and get rid of the herd of hogs that are feasting at the tax trough. example : instead of 100 senators ,we would have only twenty . instead of fifty states we would have only ten ETC.ETC. with the technology we have today we do not need all the fat hogs representing us , we can do most of our own voting by Computer.

  18. Steve | November 15, 2012

    First common sense I've heard since 2006.

  19. Eleanor McIntyre | November 15, 2012

    I am lucky enough to be financially independent (through my own efforts). Most people are not. I keep wondering what is the net worth of "wealthy" people before they stop wanting more wealth and stop complaining about legitimate taxes?

  20. Rem | November 15, 2012

    Looks like the lesson to be learned is that there should not have been tax cuts in the first place (reduces US tax income) and, of course, not government spending on wars (more than $1,000 B) – none of which, by the way, were the making of Obama. It is true that Obama spent profusely after 2008 and bailed out WS but what was the alternative at the time: sink the economy? Let huge banks fail so we (individuals and businesses) don't have access to credit or our savings and all commercial transactions come to a halt? Quite a ridiculous proposition. Nobody wanted to go there at the time and for a good reason. Again, when you get a surplus, keep it for a rainy day, don't go and spend it on tax cuts and then invade a country for no good reason. Another piece of advice: watch those bubbles…

  21. Michael G Angstreich | November 15, 2012

    Great advice but I take issue with your statement on voters and "the national credit card bill in the last four years". In 2008 we voters inherited an already massive deficit, two non-taxed, credit card wars coupled with tax relief. That takes us voters back to the origins of the problem 12 years ago by my count.

  22. Glenn | November 15, 2012

    Right on. Please send a copy to every congressional member, on the slim chance that they might listen to reason for a change.

  23. ugensky | November 15, 2012

    The country as a whole has to bear this burden to balance our deficit together…rich,middle class, and poor alike….period!But,on second thought wouldn't asking the middle class or rather the spending class to fork out more in taxes, result in rich getting poorer as the bottom line of the businesses run by the rich gets dented?

  24. john ritter | November 15, 2012

    The fiscal cliff is what Obama really wants to happen. He could never get tax increases past the Congress; he does not have to, just try and push something the House will not accept and all he wants will happen. He wants to make a large cut in defense. Here is a way he can do it and not have to take the blame. It also allows a tax increase on all which he was going to have to have, or someone would, to balance a budget, and pay down the debit. As for social programs he likes, there are short cuts to redirect monies to them. All this and he gets to blame the House of Representatives on both. I think that is too good a deal for him to pass up. All he has to do is stick by his cut off of $250 K and hope The House will not accept it. Or he can try something else like he did the last time the Speaker accepted his offer two years ago.

  25. Kevin Donnelly | November 15, 2012

    The time line of the Fiscal cliff, which was really only meant to be a line in the sand, means that the first people to be effected will be workers who will immediately lose the cuts in income on weekly paychecks. Meantime all the other cuts will be phased in later, after there is outcry from the "betrayed" workers. So kicking the can over the cliff is a non starter. Moving the "cliff" as a line in the sand is more likely

    • rick baldwin | November 15, 2012

      That's the part that does no good for anyone,including the workers getting a few more bucks.

  26. Andy | November 15, 2012

    If things don't change, and change soon, I will be leaving this meshugina country and taking my million plus bucks with me!

  27. Moki | November 15, 2012

    Until our political system is changed with term limits, pork barrel restrictions, real debt controls, true lobbyist controls, tight PAC spending limitations/disclosures and comprehensive tax reforms, it will be business as usual. There will be no Fiscal Cliff in 2013 as the present political system will come up with a compromise/solution that will just delay the devaluation of the dollar and the ever increasing government debt.

  28. Jack | November 15, 2012

    I say give President Obama the tax increase he and his Hollywood friends want and also implement an Alternate Minimum Tax (since it is good enough for the common citizen) on large and medimum corporations, like GE. The richest people would be impacted the most and it would be the President's turn to contribute to the solution of the problem.

  29. rick baldwin | November 15, 2012

    I've been saying that for some time.I'd just don't like raising the dividend tax again. That will hurt the Market.

  30. H. Craig Bradley | November 15, 2012

    Get Ready for a National VAT ( Sales Tax). Its way better than higher income taxes (brackets) and should be on the table next year if there is a rewrite of the (Income) Tax Code. Of course, states like Oregon that have no state sales tax won't like it, but we all have to pay for supporting a growing government without necessary restraints.

  31. Randolph Sheppard | November 15, 2012

    Thank you for writing this column. I was beginning to think I was crazy for thinking that our going over the fiscal cliff wouldn't be all that bad. But, you presented my case far better than I ever could have.

  32. joseph p bell | November 15, 2012

    I have said this before ,and will not repeat it . (on other sites related to 911 ) .We were talking about Freddie Mac and his girl Fannie (jamie Gorelick ,Mae ) . When she finished milking this baby ;they gave her two seats ,or 3 seats . ( 1 ) 911 Commissioner (2 ) WILMER HALE DORR CUTLER PICKERING ,WHILE serving the Commission . Other partners at this prestigious D.C. firm . "remember these are the top officials investigating themselves ",all partners at that firm . Dan Marcus ,Chief Legal Counsel for the Commission; Robert "the mule "Mueller .FBI director ;
    (3 ) United Technologies ; Gorelick , Chris Whitman (former Gov. of N.J. aka Tom Kean ) ,and GENERAL RICHARD MYERS (Northrop Grumman when he retired @ 200,000 dollars a year .
    Remember Senator Grahm ,from Texass, and his wife (she was on the Audit Committee of ENRON . .Until we nail the 911 Commissioners for Treason . we will never unravel this government . Take Fielding alone ;2000 election in Florida for Bush ;has always been there for 41 and 43 , Defended Gonzales and he still gets on this commission, Lee Hamilton and Dick Cheney were the Congressman trying bush 41 for the Iran / Contra affair ; Lee Hamilton is connected to every republican on this Commission , and the Intelligence Committees ,on both sides of the aisle . So where we go from here is up to you people . I am 78 , no money ,(enough to survive ) . I am not asking for donations .

    .

  33. Mike | November 15, 2012

    I think that between federal income tax, state income tax, property tax, sales tax, corporate tax, car tag fees, vehicle registration fees, hunting licenses, fishing licenses, business licenses, fees added to cell phone bills, and a barrage of other fees and taxes paid, that the American people pay more than enough taxes. That being said, reduced government spending should be the first priority, not raising taxes.
    I have thought along the lines of Curtis who posted earlier. I think the number of congressmen is based on state population, so why not just cut that in half. So for example if you get one per 100,000 of people, you now get 1 per 200,000. Also perk's such as the Congressional gym should go away. If I have to pay to go to a gym and you have to pay to go to a gym, then all government employees should pay to go to a gym, except military and law enforcement. Obama is fast to take others people money saying that they don't need it. Of course he has no clue what other peoples individual needs are. But how about this, Obama lives for free and travels for free, so he doesn't need that government paycheck. Cut the presidents salary down to the national average, around $50,000.00. Consider this pay level for all of congress and the house.
    Refine the government bidding and contracting process. Its so burdensome with so many people involved a $25.00 item can in the end cost hundreds or more.
    The TSA didn't exist until 9/11. Should we keep that monster or are we better off canning it and turning that task over to the private sector with a small government over-site group?
    Obama Care: Great concept health care for all. I don't think it will work. Its raising expenses on businesses that can't afford it. Several groups in the restaurant business have declared that they will be limiting hours worked to 28. That's because for outfits with 50 employees or more there is supposed to be a major Obama Care expense for employees making 30 hours or more. So people that used to work 40 hours with overtime after that will now find that they have to work two jobs and will not make overtime on either one of them. More work less pay. Thats what YOU voted for. Anyway, the bottom line will be, seeing how a lot of work that used to be accomplished on overtime pay will now be gone, that will result in LESS government revenue. We had the chance to get rid of Obama Care. You voted. You will probably regret it.
    This is just the beginning of things that need to be corrected. God only knows how much useless spending is going on. I would suggest another place to look is government grants.
    Think about this, I'm a stupid moron blue collar person. I'm thinking about and suggesting realistic possible ways to save this country from the debt problem. Meanwhile the president you just re-elected is only interested in raising taxes. And also, hiding his ass from the embassy fiasco.

  34. Argo | November 15, 2012

    Or put another way … "A 1%'er calling for a financial recession that will kick the 99%'ers in the nuts." The 1%'er isn't concerned and will actually make money on the carnage … while the rest will go a decade before any recovery affects them.

  35. mike | November 15, 2012

    Right on! The last republican president and congress did just the opposite of what they ran on – they ran up the deficit by cutting taxes and getting us in two credit card wars. The democrats had two years to do something/anything about the deficit and did nothing. The last two years have gone no where thanks to the republicans blocking anything and everything so as to make Obama look bad and stop a re-election.
    We Americans did support the war in Afganistan but for the need for Iraq was never shown but we got it anyway. So, I'd say we were part of that fiscal problem. Now, like it or not, we need to go over this cliff, learn our lesson, hurt a bit, grow a bit and come out the other side. Let's prove that we are not Greece!

  36. J. Moszynski | November 16, 2012

    I keep asking myself, why is it that everybody is a coward when it comes to discussions over what are TAXES? Are you reffering to the IRS, or "income tax? These guys are nothing but a collection agency for the Federal Reserve, and as you well know or maybe you didn't, not one red cent collected by them goes to anything Government. All of these funds stolen from the American "taxpayer", go to the Federal Reserve, to service the interest on the debt. No payrolls, no roads, no sewer, no military, no garbage, no nothing involoved with Government gets a single cent. So why is this called TAX, and why is anybody discussing this, terrified of putting that out to the public. You know why? Because once everybody finds out, there are going to be well deserved lynching bees in various parts of the country.

  37. Dorothy Lock | November 16, 2012

    Compromise on raising taxes for those earning over $250,000: For those who are sole owners or partners in a business (not employees of a corporation), subtract net earnings shown on Schedule C from total earnings. If that difference is $250,000 or under, no increase in taxes. If that difference is over $250,000, you pay the increased rate (but your net profit from your business is excluded). That way President Obama gets his increase in taxes on the very rich and the Republicans save those in business and hiring workers from tax increases on their business money.
    Simple compromise and win-win solution.

  38. Dorothy Lock | November 16, 2012

    WHAT DO YOU MEAN BY "MODERATION"?

  39. Kevin Beck | November 16, 2012

    If Obama was serious about wanting to raise taxes on "the rich," then I have a brilliant one-step solution for him. And at the same time, it will NOT raise taxes on lower-income individuals, while solving a problem with the Alternative Minimum Tax at the same time.

    1. Add a line at the bottom of the Form 6251: If your Adjusted Gross Income is less than $1,000,000, enter 0. Otherwise, enter the amount from (the previous line) here. Then enter this number on Form 1040, Line (Alternative Minimum Tax line).

    This would make sure that people who earn plenty of income through tax preference items will pay an extra tax on that income if it results in their AGI exceeding $1,000,000, thus giving in to Obama's main yapping point: Taxing the "millionaires and billionaires" at a higher rate. It would also patch up the AMT so it reduces the collateral damage (the lower-income people it was never intended to target). And just like every other tax-the-rich scheme, it will not raise much in extra revenue. But it will have the benefit of increasing the overall taxes paid by the "guilty rich," those who feel they need to pay more in taxes.

  40. Meg | November 17, 2012

    I still cringe when I read this garbage. Fortunately, we just had an election that indicated that the public is on to the self serving nature of this thinking. The most important issue is not giving Wall Street buying opportunities, which is what this writer wants, it is getting people back to work. That will raise revenue. Austerity policies benefit the 1 percent only. Wall Street is frustrated at the moment and longs for a juicy recession with a sharp drop in the market. Let's keep it frustrated.

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