In the Budget Control Act of 2011, Congress agreed to the stick-and-carrot approach of coming to a consensus on budget reform and taxes. The carrot was if they could come to an agreement, the stick would be avoided. The stick was an “unthinkable” set of automatic tax restorations and budget cuts so “horrible” that the result was “Armageddon”
Since then, and quite obviously, Congress and the President have not been able to agree an anything so the “fiscal cliff” will soon take place.
I posit that this correction is exactly what this country needs and what Washington is collectively too spineless to enact. Let's look at what will happen and the ramifications:
In the early 2000's, a series of tax cuts were enacted. The previous rates provided an actual tax surplus, which the Bush administration somehow found offensive as “it was the American people's money, and should go back to the American people.” Of course this scored a lot of points with taxpayers, because no golly, the tax rates would be the lowest they had been for over 40 years! Hooray!
Promptly ignored was the the national debt, where Congress was borrowing money it did not have to spend on things it could not afford. Like any debt, prudence would dictate that if you had a little extra money you would pay what you owe before spending it on something else. As taxes are indeed our money, the debt is also our debt. Then again, no one ever accused the US Government of being “prudent.”
Depending on the sources, economists estimate that these tax breaks cost the government $400 billion - $600 billion a year. Over ten years, that amounts to $4 trillion to $6 trillion. As a comparison, the national debt rose from around $7 trillion to around $16 trillion today. If those tax cuts had not been enacted, the debt would currently stand at $10 trillion to $12 trillion.
We are in a deeper hole due to the tax cuts, and continue to dig as long as they are in place.
And let us not forget, the tax cuts were designed to be temporary. Designed to expire, just like the limited-time Big Mack for a dollar offer at McDonald's. Letting them expire is not only doing what was planned, but fulfilling the promise made with the cuts.
The sequestration defined in the BCA will reduce governmental spending by $110 billion annually for ten years, split evenly between discretionary and non-discretionary spending. As a point of reference, these cuts are 3.1% of the budget. That is right … just 3.1%!
The lion's share of discretionary cuts would come from Defense and non-discretionary from “entitlements” like Medicare, Medicaid and Unemployment benefits.
Like the tax restorations, the spending cuts apply to what both political parties want and don't want. It is a fair deal and a deal already made.
Republicans should be particularly happy, as now they can get all those cheaters off the entitlement programs by making them leaner, and finally be able to say they are forced to give to charities they would rather do so voluntarily (I will wait with baited breath to see that happen.) The wars are winding down so the Defense cuts seem defensible.
Democrats may not be as happy. Defense cuts are good by the entre of programmed cuts to entitlement programs represents a slippery slope.
But overall, it seems a pretty even set of cuts.
And between restoring the temporary tax cuts and the sequester, it is certainly not the kind of economic Armageddon that some politicians want us to think. In fact as compared as what really needs to be done it seems actually quite modest.
Maybe the spineless leaders in Washington got something right for a change.