Procrastination no longer an option
By Elaine L. Chao | December 5, 2012
Asteroid deflection is a fascinating field of scientific research. The goal is to avert catastrophe by identifying threats far enough in advance that even a small nudge can alter a massive asteroid’s path sufficiently to avoid impact with Earth, allowing mankind to avoid the fate of the dinosaurs.
Unfortunately, few of Washington’s political minds are as forward-thinking. Indeed, over the years they have taken the exact opposite approach to governance. Instead of modest budgetary course corrections to avoid an obvious collision between federal spending, changing demographics — most notably the aging baby boomer generation, born between 1946 and 1964 — and revenue, every administration and Congress in modern times has accelerated our nation toward the inevitable “fiscal cliff.”
And so the United States’s finances increasingly resemble those of Greece. And drastic budget cuts loom for January. And Americans do not know what their tax obligations are going to be a month from now. Tragically, it has been decades since there has been sufficient will in the legislative and executive branches of the federal government to exercise, simultaneously, meaningful restraint on spending.
Today’s officeholders did not originate all of our fiscal problems. Some were not even born when the budget was set on its unsustainable trajectory. But the recklessness in recent years has been truly flabbergasting. Trillion-dollar annual deficits and annual end-of-year brinkmanship on federal taxes are now routine. Congress has failed to pass a federal budget since 2009. Only twice since 2000 have both chambers even bothered to complete all of the appropriations bills.
The 2011 standoff over raising the federal debt ceiling resulted in a reckoning of sorts in relation to spending. But Washington subsequently failed — once again — to agree on spending restraints that address the root problem: deficit-exploding entitlement programs. Instead, we wound up with a fallback provision that cuts only discretionary spending (disproportionately defense-related). This misguided non-solution is slated to take place next month.
Coincident, and far overshadowing these cuts for economic effect, will be the largest annual collective tax increase in American history, of nearly half a trillion dollars. It will take effect when the clock strikes midnight on New Year’s Eve, when the tax reforms from the previous decade expire. On top of that comes a number of new taxes attributable to the administration’s Affordable Care Act. Put it all together, and American households will see their tax bills rise, on average, by $4,100.
This tax assault — while billed largely as “making the rich pay their fair share” — will, in fact, hit small businesses and their employees especially hard and will reverberate throughout the economy. The National Federation of Independent Business reports that 75 percent of small businesses are established as “pass-through entities” and pay taxes at the individual rate. They also employ 54 percent of the private-sector workforce. And for good measure, the alternative minimum tax, which was limited to 4 million taxpayers in 2011, would ensnare 31 million additional taxpayers in 2013.
The average eighth-grader could conclude that the government’s siphoning another half a trillion dollars from the private sector next year will have a deleterious effect on an already weak economy. Yet, the White House belatedly (after the election) came forth with an alternative plan that would institute $1.6 trillion in tax increases over the next decade. The plan includes an incommensurate carrot to the budget-minded consisting of $400 billion in unspecified reductions in spending.
This kick-the-can-down-the-road behavior on spending has got to stop. It has been going on so long that budgetary course corrections now have to be more significant than they would have been had even a modicum of discipline been instituted 20 years ago. Still, even modest spending reforms could make a real difference. Such reforms would include limiting eligibility for some entitlements and modifying indexing formulas.
The bloated, incomprehensible, inefficient and unfair U.S. tax code surely is in need of major reform. But this must be undertaken with the full understanding that there will be economic reverberations. Poorly conceived or crafted reforms could result in net reductions in revenue by harming private-sector enterprises, causing job losses and impeding job creation.
Avoiding more fiscal cliffs in the coming decade would entail a degree of political courage and foresight that has been lacking in Washington for a long time. But if today’s leaders want to be remembered for something other than getting reelected and bankrupting future generations, now is the time to step up.