Friday, December 21, 2012
Nibiru and the Fiscal Cliff
What has been amazing to me is that the left (Obama and beyond) have not had their feet held to the fire yet by the supposedly objective media. Ultimately, Boehner and the President have moved a bit on their initial positions but the MSM seem to think the real discussion here is about revenue only or revenue and a tiny amount of spending cuts. What we should be having a national discussion on is just how much of our GDP should be extracted to run the federal government. The long term goal here should be to get us a lot closer to the 18-19% that it has been for the last couple of decades.
There seem to be several sticking points. The difference between raising rates on taxpayers making $400,000 and $1,000,000 (Obama and the left would prefer the lower number). There has certainly been movement here - the President started at raising rates on incomes of $200,000 and the Speaker rejected any raise in rates. Both sides would limit the use of deductions for the highest income taxpayers. They both seem to have agreed to raise rates to 20% on capital gains. Although some of the hard left would prefer no capital gains differential.
The President has dropped his plan to extend the Social Security rate cut. So it seems for sure that rate will go up on January 1. And in my opinion, it should. They seem to have agreed on modifying the COLA for Social Security to an index that would rise a bit slower and has an assumption that when prices rise in one area people substitute consumption of other products. That seems like real progress. Where they remain apart is the Boehner proposal to gradually raise the eligibility age for Medicare to 67. That was done in the 1983 compromise for Social Security benefits and seems like an eminently reasonable change to Medicare.
The gulf on Estate Taxes is pretty large. The President would like to both raise rates (to 45%) and lower limits (to $3.5 million) while Boehner would like to keep rates and set the exclusion at $5 million. While I believe the Speaker's plan is appropriate, this seems like an issue where the difference could be split and then indexed.
But on spending there is still a lot of work to be done. For example, according to the NYT about a quarter of the Administration's reductions in spending come from an economic assumption of lowered payments on the national debt. While it is probable that interest costs will decline as a result of less spending, rates for federal borrowing are unlikely to remain at their depressed rates for the next decade. The President also wants some more money spent NOW on infrastructure and extended unemployment benefits. Both of those should be paid for with more reductions in other government spending.
NYT has an option for figuring out how to reduce the deficit. A graphic of my solution is presented to the left.
Ultimately I hope that the political class - in this case I mean a lot more than one group of GOP members in the House that stopped Plan B from moving forward - will act responsibly to reduce the deficit before the fiscal cliff happens. Both sides should be looking for three things - real spending reductions, some revenue increases, and an overall plan that will reduce the percentage of the GDP going to the federal government. Some members of the GOP have a problem with any revenue increase but more democrats have a problem with an real reductions in spending. If they cannot act like grownups then I say we should let the cliff happen.