Standing at the Edge of a Fiscal Cliff
By now, the candidates for president of the United States are set, rhetorical battle lines are being drawn and the “first 100 days” are returning as a political instrument promoting what a president such as Mitt Romney could act on first versus what President Obama’s second term could mean.
While the election of our chief executive for the next four years is undoubtedly the most important decision we may make in 2012, major changes are set to take place before he is sworn in January 2013.
If Congress does nothing, meaning if it does not send specific pieces of legislation to the president to sign by New Year’s Eve of this year, taxes will increase and billions of federal dollars will be pulled from our economy. This is something that most economists, Federal Reserve Chairman Ben Bernake included, believe will devastate the economy and our recovery. Bernanke reminded Congress that at the end of this year, “There’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
The typical voter may be easily persuaded into believing that the so-called “Bush tax cuts” do little more than serve as a payback to the wealthy. With that being said, two facts should be taken into account. First, there are the tax rates millions of businesses and individuals have grown accustomed to and planned around since 2003. Simply put, not extending them doesn’t mean Congress eliminates an unfair tax break. What it does mean is that taxes go up. Second, they were already extended and signed into law by the president in 2010. It is hard to rail against the inequities of America’s wealthy when you’ve signed these same tax rates into law!
Most agree the cuts encouraged investment by lowering the rates on dividends and capital gains as well as protecting families by not leveling a devastating tax upon the death of a loved one. Many small businesses, ASA members included, regularly face issues dealing with succession. This is something an estate tax, or more appropriately a death tax, could wreak havoc upon how the next generation addresses a company’s future.
And then there is the issue of spending. Last year, when Democrats and Republicans in the House and Senate fought to raise our debt ceiling limit, both sides did something rarely done in politics. They held hands and jumped off a cliff by agreeing to billions of dollars in cuts to defense and domestic spending known as sequestration. The reality is sequestration wasn’t meant to slash federal spending by an amount so large that it would bring harm to our economy. It was done to force a deal. It was done to force legislators to the table and finally come to some agreement. They managed the first task by forming the “Super Committee.” We all know how that worked out; the “Super Committee” failed and sequestration looms.
As noted, it is without question that this fall’s national elections will be messy. In Washington, whether members of Congress tackle closing the looming sequestration spigot while also preventing across-the-board tax increases before or after their next election, remains to be seen. While most believe that we are in store for a historic lame-duck session, what the session produces could be equally as historic.