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Wednesday, January 2, 2013

The Fiscal Cliff Deal: Country-Helping Compromise or Crap Sandwich?

You've now undoubtedly heard that the House of Representatives has voted in favor of the Senate's version of the Fiscal Cliff bill (officially titled the American Taxpayer Relief Act of 2012). President Obama is expected to sign it soon. To see the pdf of the bill, go here:

So what do you think? Is this good for the country? Did one side win? Did one side lose? What about the process?

My opinion:

First, I want to address the process. This might sound odd to some, but in my opinion, the process is the biggest winner here... to some extent. Our bicameral legislature was established to do exactly what the Congress just did: Debate, delegate, argue, and move slowly towards a compromise. While the Fiscal Cliff negotiation process was "oversensationalized" by the media, (albeit, a heavily-slanted media that used this opportunity to push an agenda), it went precisely as our Forefathers envisioned. Our legislative body, the Congress, was designed to be slow. It was designed this way to ensure tyrannical, quick, dictator-like laws were difficult to enact. Our Forefathers believed that if laws were passed quickly, they would not be passed properly. If it was possible for a bill to become law in quick fashion, without debate (which is a representation of the people spread around this country), why not just have one man or woman, namely, a king or queen, simply implement laws? I addressed this previously, and I do believe wholeheartedly in the concept of legislative compromise:

     "Compromise is NOT bargaining to get 100% of what you want. Team X wants A and can give B, and the Team Y wants C and can give D. It must also be understood that a "compromise" is not the attempt, nor the result to get all of the other side's object(s) of concession. A compromise is not, as a condition of the compromise, saying, "I will do some of what you want, if you do ALL of what I want." With this simple letter-based anecdote, a proper compromise means the first side gets some of A while giving up some of B, and the second side gives up some of D in order to get some of C."

In the end, this is what happened. Outsiders will surely attempt to analyze who won and who lost, and they'll try to quantify the bill based on who gave up what and who gained what, but that's all meaningless when discussing the process. Here, the process worked, and the only reason I initially said "to some extent" with my rating was because it was pushed to and past, irresponsibly, a self-imposed deadline. Ideally, this deal should have been negotiated prior to the "Fiscal Cliff" being reached, but sadly, it was not. Like an irresponsible high school student, our Congress, along with the President, talked about doing something for months, but unfortunately, they all waited until the end to get something done. All in all, the Congress did what it was intended to do, and no party gave all, while no party gained all. Score one for American-style democracy.

Now to the important part: the deal. In my opinion, this is an absolutely terrible deal. First, it further promotes discrimination. I've addressed this many times before: I do NOT favor any form of federal progressive-rate taxation on the grounds that it is inherently discriminatory. I don't care if the country's budgetary issues could be resolved tomorrow by a "tax the rich" plan, I would never be in favor of a system whereas one group of citizens is taxed at a greater rate than another. We are America. Our government is supposed to treat each citizen, in every aspect of life, equally and without prejudice. Why is it okay, in this country that is founded upon this principle, to tax people in discriminating fashion using different rates for different citizens? We seem to absolutely love the concept of equality until it applies to the issue of taxation, an issue in which most citizens seem to become prophets of discrimination so long as someone else gets taxed. They will happily overlook the inherent inequality in making someone else pay a greater rate than themselves if it doesn't touch their wallet as much. Think about it: when would it ever be okay to corner a small group of citizens and treat them differently with respect to federal law? (Yes, I know the debate applies to such legislation as DOMA - something I think the federal government should repeal, and in all instances federal, the government should treat everyone equally). Would it be okay if the government treated people differently with respect to military service? What if the government figured out which race of people tended to be the healthiest and legislated a bill that said that citizens of that race must serve longer terms in the military relative to service members of every other race? What if the bill said that citizens of that race were required to serve in the military while other races' service was voluntary. It's for the good of the country, right? Of course not. We should never discriminate in this way, and I'm sure the country would be up in arms (well, probably not since it would only affect a small portion of the population) if a law like this was enacted. But, as with money and taxation, no one seems to be upset since it doesn't affect 99.27% of the population. To me, the increased "progressiveness" of this bill with respect to taxation, and the government promotion of discrimination is disgusting, un-American, and another dangerous precedent setter for further tax policy legislation.

Secondly, what in the world did this solve from a budget/deficit standpoint? A previous analysis I conducted showed the dismal effects of raising tax rates on those making > $200,000 per year. In the Fiscal Cliff bill, that threshold is raised to individuals making > $400,000 per year and families making $450,000 per year. On the revenue side, the tax base of wealthy taxpayers shrunk from about 2.0% of the population to about 0.73%. Therefore, if the original plan to increase revenue by raising taxes on those making > $200,000 raised a minuscule amount of revenue, how in the world would shrinking the tax base do anything better? The fact is, it doesn't. Using simple "back of the envelope" math utilizing the taxpayer income breakdowns seen here, I'd estimate there to be about 1,025,600 taxpayers are above the threshold that will experience the increased tax rates in the new bill. Their top marginal rate jumps from the current 35.0% rate to 39.6% rate, or 4.6 percentage points. To maximize the amount of revenue raised, let's just assume these taxpayers see their taxes increase by 4.6 percentage points (we will ignore the additional math of marginal rates here and just go with a flat-line 4.6 percentage point increase... it will be close, and for this analysis, it actually yields more revenue). Using the data from chart #2 in the previous link, I'd say a safe estimate for the total income earned by these high earners is $1,355,960,691,392. A 4.6% tax of this income would be $61 billion in new tax revenue. That's a mere drop in the bucket relative to the federal budget deficit of approximately $1.3 trillion. Additionally, the CBO confirms this, and this Fiscal Cliff "deal" does virtually nothing to stop our government's monetary bleeding. So was a deal that does virtually nothing to reduce our deficits on the revenue side really worth discarding American principles of equality for all? I don't think so. Some will say, "well, it's a start, and every bit helps." While this is true, I personally don't think it is worth it, and the economic consequences of taking money out of the pockets of job creators, venture capitalist investors, and other engines of financial/economic expansion, in my opinion, will far outweigh the benefits of the inefficient, wasteful, semi-corrupt government receiving more revenue that barely amounts to 22% of the interest payments we make every year.

Thirdly, this did absolutely nothing in the way of spending. NOTHING. All it did was kick the can down the road. The "sequester" - the massive spending cuts that were set to begin upon going over the fiscal cliff - have been pushed down the road for two months. This leaves them "unaddressed" and unanswered, and with a new House coming in tomorrow, the negotiation process begins again. Get ready for another Fiscal Cliff in about two months time. As expected, this is barely being reported by the press.

Fourth, and a truly sad point at that... hello increased taxes for all!! Absent from the Fiscal Cliff deal was an extension of the Payroll Tax Holiday - the 2 percentage point reduction in American workers' payroll tax requirement. This provision wasn't even addressed in the Fiscal Cliff talks, and because of that, pretty much every "regular" worker in America will see their take home paychecks shrink. While the original intent of the holiday was temporary, Americans got used to it. For two years, they experienced a certain "type" of paycheck. Now, with the expiration of the holiday, their take home pay goes down. Many will argue, "well, yes, it was temporary, and no, the holiday didn't help the economy." I argue that a $30 per paycheck loss every two weeks will hurt the average worker, and the effect of the holiday's expiration will feel like a tax hike regardless of the holiday's original temporary notions. In my opinion, this should have been extended for at least another year, and when it came time to let it expire, it should have been done gradually. I know for me, since I get paid on Wednesday, my paycheck decreased by $42.66. That's a $1,397 per year hit for me personally, and that's $1,397 that I cannot turn around and spend on food, shoes, gas, and other goods and services that drive the economy. If raising taxes in a "down" economy is bad, why in the world was such a massive tax increase on the middle class permitted?

I could go on and on about this deal (yes, I've read the pdf in its entirety), but these things I addressed, to me, are the 4 major sticking points. I think the deal is pure junk, and the sycophantic individuals that make up our government will be sure to spin it, bleach it, fluff it, and present it in a way that inflates their heads further. They will sell this as a "victory for the American people" and a bill that "while not perfect, is better than going over the Fiscal Cliff." I'll readily disagree with that notion, pointing to the four main reasons I've cited, and one main one I didn't: precedent. While our elected officials will pat themselves on the back for averting the Fiscal Cliff, all they did was set a precedent to more delaying, back-room negotiations, discrimination, and ineffective government solutions where the members of this government are concerned more about how they look than how they legislated.

What do you think? Please share your thoughts below. Also, be sure to vote in our Fiscal Cliff poll on the left side of the blog.

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  1. Came here from your post on bloomberg. Nice write up.

  2. Oh yah, this too:

    1. Good ol' "balanced" approach

  3. Hi LME -

    There was a NYT opinion piece a couple of days ago - bagging our outdated 'archaic and evil' Constitution w/regard to the very process you outlined.

    The writer felt we should dispose of it BUT KEEP the 'parts' that he 'feels' benefit him and those LIKE him... go figure.

    Although I HATE the outcome of this 'fiscal cliff' fiasco - the process worked exactly as it was designed to.

    The 'deal' stinks on ice --->>

    ...but I can't imagine the nightmare we'd have ended up with - had there been NO opposition debate w/Obama and his spendthrift, ignorant, conscienceless ilk.

    What Obama's GimmeDat minions FAIL to realize - by the time the SHTF HE and MOST of the Dimocrat/Republistupid PINHEADS who CAUSED THIS MESS will be retired and living high on the hog - off We The People!

    And next up: A sequestration/debt ceiling fight.

    Obama: Debt Ceiling Not Up For Negotiation -

    Remember, the one's initial 'offer' to Congress included a BLANK CHECK to replace the Debt Ceiling.

    With a new Congress chock FULL of spend NOW, pay NEVER Dimocrats - I see Greece.

  4. Hey there LME,

    A bit late to the party; been swamped lately. Work, work, work.

    But, I did want to comment!

    First, I agree with your initial statements. Like you, I wish there wasn’t an artificial deadline, and/or I wish that we could have reached an agreement long before it… but, I still like that there was some sort of a common ground found here. And I think that the process ultimately worked the way it was meant to, although just not in the best fashion.

    At the same time, I’m also not too happy with the bill for similar reasons; failure to address the spending portion, no extension of the payroll tax cut, etc.
    As for your first point, without having that topic dominate the conversation, I think we both know I disagree. :)

    I find it odd though that you chose to center your argument on taxation around the concept of our government promoting/the concept of equality. That’s actually more of a socialistic argument than a capitalism argument, no?
    “Socialists generally argue that capitalism concentrates power and wealth within a small segment of society that controls the means of production and derives its wealth through a system of exploitation. This creates a stratified society based on unequal social relations that fails to provide equal opportunities for every individual to maximize their potential, and does not utilize available technology and resources to their maximum potential in the interests of the public”

    I’d just say that this discussion is more complicated to me than basing it mostly on an argument of equality, as it has many potential definitions as it applies to government/social structures.

    1. Continued~

      Regarding the second point, I feel like this argument is one of the most subjective (and less effective) points I see many make; on both sides of the aisle. In particular, I’ve seen people on the right passionately debate over how egregious spending like the $535m lost with Solyndra is for Democrats/Obama, or how an exemplified part of our spending solution involves the $300m that funds PBS. And I don’t necessarily disagree. But, then, when a tax solution ‘only’ reduces deficits by $61 bill per year, it’s now a ‘drop in the bucket’? Seems to me it’s more about not liking the details of the solution, as opposed to not liking the numbers. In which case, arguing the ladder just takes away from the strength of the original argument.

      But the fact is, that regardless of which side is making the argument, I can’t accept the idea that “the number saved is too small relative to the entire deficit, therefore it’s not worth doing” as an argument. To me, that leads us getting absolutely no where, and is simply an attempt to easily dismiss a solution.

      There is no single easy way to reign in our deficits that involves reducing it by sizeable 1/4th+ chunks at a time. The best (and likely only) balanced way to do this will involve a very large sequence of very diverse cuts (and even some taxes) in many different places, that will all add up to a decent number together. But if we allow people to frame every single one of those individual cuts/taxes against the deficit in its entirety (and believe me, people will… again on both sides), and use the ‘drop in a bucket’ argument to dismiss it, we get no where.

      A part of an ultimate solution should not be graded purely on how it affects the deficit, but on the argument that supports it. Ignoring the argument and saying “pssh, it doesn’t solve our deficit issues by itself, so don’t even discuss it” is a dangerous and self-defeating precedent to set.
      Third point. Here, we agree. I very much hope that we can reach a serious compromise on spending cuts as well, and hopefully not too late.

      I’m concerned that it may be even more difficult than the tax debate. I’m hoping both sides can reach some agreement though, particularly for the Democrats (which in this topic, I’m less confident in).
      I’m just a bit curious on this fourth point; I was under the impression that most conservatives opposed the payroll tax cut? Or well, I’m sure no one likes the idea of earning less money, but this wasn’t exactly a widely supported cut among the GOP circles. Last year it almost wasn’t renewed, simply because of debates in paying for it and how. And well, one could also probably argue it is a somewhat ‘discriminatory’ tax cut in that it primarily benefits the lower and middle class.

      I do also wish it was extended though. All well. :(

    2. RKen - Good morning! And it's never too late for good, civil debate!

      (I only loaded you up with that cheezy line because it rhymed :-P )

      For my first point, it's not really the center of my point with respect to the Fiscal Cliff bill (though I see how you got that), I just try to write each piece as an independent article. For those who do not know how I feel about progressive rate taxation, or maybe for those who haven't seen this blog before, I try to write things anew from the beginning. While it isn't my sole reason for disliking the bill, I just wanted to ensure that people know I'm strongly against it and any form of progressive rate taxation alike. I do definitely oppose this because, with respect to revenues, that's exactly what it did, and yes, I think it's incorrect and un-American. I know you disagree with me, as you always have, and that's fine :)

      For the second point, I don't believe in a "it's incredibly small so we shouldn't do it" argument, and maybe I'm a little unclear about that, but what I do believe in is the argument being made that it's imperative to do this in the manner we did. For allllllllllll the press/president time given to the "we must tax millionaires and billionaires" more plan, one would think it would be a magic save-all solution. This is why I believe the plan amounts to nothing but class warfare. We have average, everyday Americans who continually rant about taxing the rich more (based on what I believe is the "over-sensationalizing" of this issue by the media and the left), when it really does virtually nothing. Again, it's not the "we shouldn't do this because it does virtually nothing," argument... it's the "stop brainwashing people as if this is a great, wonderful, it-must-be-done solution. It's not. The numbers show that. Moreover, if we could reduce the deficit by making little, one-by-one adjustments, that's fine, but sadly, as you've pointed out, the same isn't accounted for on the spending side (this also contributes to the crap deal part).

    3. As for the fourth - yes... some, not all, conservatives were against the payroll tax holiday, but just as one of my favorite expressions goes ("are you hungry? Oh there used to be a Burger King across the street" - I just love that lol), the main point with this issue is that an income becomes "realized" and "felt" in spite of all the budgetary moves and "holidays" it comprises. Yes, it was a holiday, but yes, people got used to it. I know for me, I had to go through our entire budget and remove about $2,200 from it for this year. That's a large chunk of change that we as a family cannot spend on goods and services. While yes, some conservatives opposed it, it still got passed and incorporated into American life. In a slowly moving economy, taking that away (especially in the fashion in which it was taken away), with a BOOM, all at once approach, will hurt many, many Americans. I, too, wish it was extended, so with that being in the overall bill (or not being in it), with respect to the whole situation, I don't agree with the final product.

      It's good to see we agree on some things. And like you, I agree that the Congress did work in the way it was intended to work... just not in the best of the best way.

    4. Good afternoon :)

      First - I understand what you mean now on that, and get your point. I'm sure we'll have plenty more discussions on this topic!

      Second - I might've misunderstood your main original point here then. It came across to me as more of a "it's too small, so it's not worth doing" as opposed to "it's so small, it's not worth wasting this much time on." The second is a completely fair argument to make, and I can't even necessarily disagree. I'm still glad they managed to get *somewhere* (as opposed to last time), but yeah, it certainly was not anywhere near as far as it should have been for the amount of time and energy spent on the topic. Most of this for me though, again comes down to not making any progress on the spending side yet (disappointing).

      Fourth - I definitely agree. Personally, I think that they should've opted to extend it for one more year and then gradually phase it in, as you mentioned. Perhaps make it a 1% cut instead of the 2% for 2014, and then back to normal for 2015. Much easier on people's pockets during what is ultimately still a very fragile and tough economic time.