We have some great news from Congress that the fiscal cliff has been averted, apparently. The legislation that is estimated to raise $600,000,000,000 over the course of the next decade will raise taxes on individuals making more than $400,000 per year and couples making more than $450,000 per year. It raises the estate tax from 35% to 40%. It changes the alternative minimum tax to be adjusted for inflation every year (which was something that should have been written into the original AMT legislation, but better late than never). Other highlights that CNN points out are an extension of unemployment insurance for 2 million people and renewed tax credits for research and development, child care, and tuition. Break open the champagne, folks, we wiggled out of that pickle!
Or did we? I would submit that America has been off a “fiscal cliff” since some time during the Bush Administration and that Obama has only tied an anchor to the country’s feet. I submit also that this “fiscal cliff” of late 2012 was a paper tiger in light of the country’s real financial issues. Would you care for me to back those claims up? Here we go! When Clinton left office, the government enjoyed a “budget surplus”: tax revenue was greater than expenses so extra money could be used to chip away at the national debt. Bush reversed this trend and the national debt has been growing ever since. By the time he left office that debt had grown from $5,727,776,738,304.64 to $10,626,877,048,913.08. That is no small amount of money, and I’m purposely writing the numbers out in their fully extended version because I think that the impact of these mind-blowingly large numbers is lost when using words like “billion” and “trillion”. Now when Obama took office, the national debt was $10,626,877,048,913.08, as we see from above, and as of December 28th, 2012, the national debt was $16,336,461,552,606.35 (statistics from treasurydirect.org). So we’ve had two presidents in a row who have spent vast amounts of money and Obama has added even more to the national debt in one term of office than Bush did during his eight years combined. It is no secret that spending more than you make is unwise on a personal level or company-level so it is kind of appalling that a country can get away with it. There are obviously quite important differences that allow a country to continue in this bad behavior but the real consequences of borrowing money and accruing debt is the same for any level of entity.
If a bank calls the debt of someone with a home mortgage and the person can’t pay, the house is taken by the bank. If a government’s debt is called by the entity that owns its debt, what happens? I shudder to think considering that a lot of US debt is owned by foreign nations. Luckily America doesn’t owe any single nation so much that it couldn’t be repaid through some difficult maneuvers, at least not yet. As time goes on, this will not be the case and, as one Chinese professor told our class one day, “The Chinese know they’ll never be paid back”. Infer as you will.
But back to the Fiscal Cliff: I said it was a paper tiger and so I hope you see that this scrambling and ballyhooing for an extra 4.6% of income tax revenue from less than one percent of the population is miniscule in light of the massive financial trouble we’re in already. I grant that the insidious tax increases in Social Security will help in some way with that chunk of government spending, by impoverishing the rest of us to a 2% greater extent (the amount of the temporary reduction that expired). What can be done though? Surely we don’t expect the government to solve its financial woes like regular folks do: by spending less and saving more. After all, it is much easier to raise taxes than to scrutinize spending and eliminate waste or inefficiency. Why go through the trouble of becoming responsible when you can rob your populace of their money? This is exactly what we saw in the 11th hour of congressional negotiations when all we heard from Washington was hateful rhetoric and the news that no spending would be cut, only that taxes would increase. This was a huge political victory for the President who has always been clear that he wanted to tax the rich more. Good for him! I wish there was a silver lining here, folks, but this extra money raised through new tax revenue does little more than open a broken parachute as our government plummets ever closer to financial doom.
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