As many of you know, I was invited to the White House to participate in a discussion on the issues collectively known as the Fiscal Cliff. The experience has left me deeply appreciative for our tri-cameral legislative system, our current administration and, the wondrous ingenuity and innovation of American businesses.
The room was filled with the most diverse group of business leaders I have ever had the privilege of being part of- in one space. I do not pretend to be an expert in the tax code, economics or political science. Even though I am none of those, I had the opportunity, not only to be present, but, voice my questions and concerns and, have them answered by senior level staff. It afforded me the opportunity to gather a deeper understanding of the concerns on both sides of the fence. It provided knowledge and insight I have the privilege of sharing with you.
For most of us, the language of economic policy goes directly over our heads. Not because, we are not intelligent enough to understand, but more simply, it is nearly impossible to figure out exactly how those policy changes impact us. The sheer grandeur of the numbers discussed is intimidating. Who knows what a billion or trillion dollars actually means? If I told you that if you spent one dollar every second of every day for the next 30 years you still wouldn’t have spent a billion dollars, would you believe it? Can you imagine how long a trillion would take? Outside of the world of economic discussion, those numbers are utterly foreign to most people. I will not even attempt to explain GDP and the fact that ALL economic plans are a relative percentage of GDP, not just tax rate. If I tried to, I’d have to come up with a simple way of explaining that our tax rate is the lowest percentage of GDP in nearly 2 decades.
There are even those who believe, with some merit that the Fiscal Cliff isn’t a cliff at all. It more like a rolling decline- call it a curb. No matter how you term the coming January 2nd cut off, in an effort to make it a little simpler, here are my takeaways regarding the “Fiscal Cliff”.
The Fiscal Cliff for dummies (myself included)…
What is the “Cliff”? Here, is the Cliff notes version –pun intended.
In 2001 and 2003 President G.W. Bush enacted a series of tax cuts (the Bush tax cuts) for both middle class and upper income Americans. The cuts reduced income taxes to free up additional spendable income per household. These cuts, set to expire on 1/2/13, represent about a $2000.00 per family tax hike for the average American. The tax increase is obviously relative to your total earned income and, therefore, hits higher earners harder than lower earners. You have likely heard that the expiration of these tax cuts returns us to the tax rates during the Clinton (you’d think it was the Golden) Era.
The word sequestration may sound familiar to you. Last year; during the Congressionally created completely avoidable debt ceiling debacle, the Tea party and its cohorts forced the passing of a debt reduction proposal so distasteful to EVERYONE that no one ever thought it would stand a chance of becoming actual policy. It passed to keep government functioning and, to buy time to write a real policy proposal that wouldn’t arbitrarily hack billions from the Federal budget (completely irresponsibly).
The Fiscal Cliff is the combination of both the tax cuts expiring and the implementation of the automatic spending cuts, sequestration. It is attention worthy because the results of these combined actions could have profound negative impact on the US economy.
I’m not sure if there’s anyone who watches the news who hasn’t heard of Simpson-Bowles. Short version, the 2011 commission formed to analyze the national debt and develop a plan to attack the deficit and stabilize the economy. The President’s plan and the Ryan budget are measured against the Simpson-Bowles analysis. It has bipartisan support and the support of the business community. (Call it the fiscal golden child.) The most notable thing to know about Simpson-Bowles: it begins with the assumption that ALL the Bush tax cuts are expired.
So here’s what you need to know.
The Ryan plan is absurd. The numbers do not add up. It is a bunch of magic math, most of which attacks entitlements, to the tune of 58% of the savings in his plan. It guts the wrong end of discretionary spending and further defunds critical social programs that can’t afford any more cuts. It has no new revenue creation (no new money comes in because it refuses to raise taxes on the wealthy). Instead, it closes unspecified tax loopholes, known to you and I as tax credits. Putting things like mortgage interest, marriage, college tuition and, other vital middle class building incentives on the chopping block. It does, however, successfully rescue the upper income tax reductions.
The President’s plan isn’t perfect, but, assuredly protects more American families and American small and medium businesses, roughly 98% and 97% respectively, by keeping the middle class tax cuts. It cuts entitlements, but, by only 8% and since it allows the upper income tax cuts to expire it off sets the cost of necessary spending. That means the average American household gets to hang on to that $2000.00 cut in both the Ryan budget and Simpson-Bowles plan. The plan leaves Social Security off the table, refusing to cut benefits when SS does not add anything to the national debt and our seniors and disabled Americans rely on those dollars. It begins to address the debt more effectively than the Ryan plan. For those of you whom 10 year projections matter, it shrinks spending by $640 billion, where the Ryan plan adds $3.1 trillion.
The fact is the best solution for all our tax and deficit woes is increasing the GDP. Well, that can only be done if people are spending more and buying more, that $2000.00 per household will be an integral part. Businesses don't expand or hire with worries of new crisis- real or imagined, coming out of Washington. So, whether you are Fiscal Cliff phobic or a Cliff jumper the reality is that the American economy is consumer driven. Congress is in no position to play chicken with American solvency. Our President and his administration committed to including as many voices in making final policy decisions as possible. That commitment is undermined when we allow special interest groups, in this case the ultra wealthy, to protect their wealth by exploiting everyone else’s.
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