THE FISCAL CLIFF

One of the phenoms of electing politicians is how they spin the margin of their victory to result in a supposed mandate from the people. Although this Prexy won reelection by about 2% of the vote, some of his cronies still use the word “mandate” when discussing his narrow margin of victory. Of even greater irony is how politicians spin the nature of their supposed mandate. This Prexy is now arguing that since he won re-election after campaigning on raising taxes for the top 2% of earners, everyone agreed with him that this should be done. Even this Prexy has to recognize the obvious truth that many people who voted for him did so based on his stand on other issues, including social issues like gay rights and contraception for example. In fact, polls show that about the same number of people who voted for our Prexy agree that it’s no sweat if the highest earners get their taxes raised.

For their part, the Elephants argue that raising taxes on the top earners would hurt job growth because most of these taxpayers are small businessmen. While their underlying argument may have merit, the argument that most of the top earners are mom and pop business people is largely bogus. In fact, while 48% of net income ( in 2007 ) came from proprietorships, partnerships and S corps for those earning more than $250,000 per year (Obomba’s magic number for his definition of “rich” people whom he wants to see pay higher taxes), most of what is being listed on these folk’s tax returns is being earned from investments in and not from the actual operation of a small business.

Without attempting to predict whether a deal to raise taxes on the highest earners will occur, thus avoiding the imposition of draconian spending cuts and higher taxes on all Americans on January 1, 2013, an examination of the issue, itself, should convince any objective observer that the idea is purely politics and of no real value in solving our admitted economic woes.

What will raising taxes on those earning more than $200,000 individually or $250,000 if married do for our economy?

The whole purpose of generating additional tax dollars is to raise more money to operate the federal government. This presupposes that it is a good idea. Given the waste of tax dollars that aim is debatable. We also have a deficit which ranges from 16 trillion dollars to as high as 86 trillion dollars depending on which estimate you read. If we raise taxes and generate more revenue, then seemingly, we can use this additional revenue to pay down the deficit. Finally, we need to factor in history which demonstrates in both Repub and Demo administrations, the highest tax dollars were generated when tax rates were lowered not raised.

If the Elephants cave in and the prexy gets his wish and we raise tax rates on the top 2% of earners, here are the likely outcomes.

1. The money generated in additional taxes will operate the government for approximately one week. If the money were used to reduce the deficit, it would only reduce it by about a trillion dollars. Thus, the argument that raising taxes on the highest earners would make a significant difference in raising additional revenue or make any real dent in the deficit is wishful thinking.

2. Unless the tax code is also reformed, simply raising tax rates is unlikely to generate much in additional revenue since the richest American taxpayers also can afford the accountants and tax lawyers to avoid paying taxes. As we know, about 47% of all Americans pay no income tax. If one in five Americans are below the poverty line (20%), then seemingly another 27% should be paying taxes but obviously are not. That is what is laughable about the prexy’s statements about “paying a fair share.”

3. Even if most business income is generated from investments in business rather than running a business, higher taxes will discourage those investments and for the real small businesses discourage reinvestment, expansion (hiring more workers). It is axiomatic that if a small business is facing higher taxes, why hire? Why spend money to expand? Even now, before we’ll know whether we will go over the fiscal cliff, businesses are pulling in their horns and going into a siege mentality.

Finally, there are two other important points to consider in this debate on raising taxes, one philosophical, one very practical. On the philosophical side, is it fair to raise taxes on the highest earners? The argument posited by some is that, for example, in 2006, 3.8% of Americans earned more than $200,000 but they paid over 50% of the taxes collected that year. On the other hand, most of the wealth in this country is held by these top earners and our current tax system’s progressiveness declines as the rates increase, meaning that top earners progressively pay less than those in lower brackets. And, as noted above, top earners often pay no tax or lower taxes by not

showing any taxable income or by having their earnings taxed at lower rates by characterizing those earnings as something other than straight income.

Of far greater importance is that while we debate raising taxes, there is no serious discussion about cutting spending. Most objective economists and other less partisan observers realize that while revenue must be a component of getting our fiscal house in order, we must also look at cutting spending by the government. When our prexy was asked on a talk show about the deficit, he feigned not knowing the exact amount but laughingly concluded it isn’t a problem for now. Wrong. It doesn’t take an economist to realize that whether as an individual or a government, you spend more than you take in, sooner or later you’re going to have to pay the piper. For individuals, that means bankruptcy court. But there are no bankruptcy courts for nations as some of the European countries are now finding out.

What many people do not realize is that our deficit cannot exceed our GDP. When that happens, we are officially spending more than we’re taking in. We are marching, seemingly unconcerned, to that point. Unless we cut spending, we’re headed for a Greece like status. It is also interesting to note that besides printing money in our rush to reach the real fiscal cliff, we are also generating a serious national security issue for our country by borrowing 40 cents on every dollar from our main economic and military rival, China, leading some wags to suggest that we’ll all be speaking Mandarin in a few years anyway.

The Elephants have correctly pointed out that as much or more of the revenues argued for by the Prexy can be raised through other means than raising tax rates. But even if the Repubs cave on that issue, the revenue being generated alone, will not be sufficient to either operate the gumment or reduce our deficit. To accomplish that, we will need to put serious spending cuts on the table as well.

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