LATINO/The raw numbers and reality of the 'fiscal cliff'
Thursday, November 29, 2012 3:20 PM
Turn on the news today and you'll hear a lot of ominous talk about the "fiscal cliff." You'll also stand witness to much spin from both sides of the aisle. Beyond their regurgitated talking points, few will tell the truth about how we arrived here, what the fiscal cliff actually is and what it would take to avert falling off of it. The truth is that the rhetoric to which we are subjected is not nearly as grim as the long term reality we face.
To accurately assess and address our financial problems, it behooves us to consider how we arrived at this tipping point. When George W. Bush took office in 2001, the U.S. national debt was $5.8 trillion. That same year, President Bush proposed across the board tax cuts. Though Republicans wished to make the cuts permanent, in negotiations, Democrats refused. Ultimately, the tax cuts were passed with a 10 year expiration date. In President Bush's eight years in office, tax revenue to the federal government increased from $1.9 trillion to highs of $2.57 trillion in 2007 and $2.53 trillion in 2008. In other words, we experienced substantial revenue growth after the Bush tax cuts. In that same eight year span, President Bush averaged deficits (spent more than we made) of $250.7 billion a year, with the largest deficit reaching $458 billion in 2008 (at the time, the largest in U.S. history).
In 2008, our economy experienced a catastrophic blow, as years of negligent, government-incentivized lending reached a melting point and the mortgage industry and those who traded mortgages neared collapse. Coming off of the bursting of the mortgage bubble in 2008, revenues declined sharply to $2.1 trillion in 2009. In the meantime, so-called "stimulus" spending ballooned overall federal spending from $2.9 trillion in fiscal year 2008 to over $3.5 trillion in fiscal year 2009. The combination of reduced revenue and increased spending resulted in a $1.4 trillion deficit for 2009.
Some defenders of President Obama have attributed this deficit solely to President Bush in an effort to make the claim that President Obama increased spending less than every president since Dwight D. Eisenhower. This claim is deeply flawed. President Bush's outgoing budget for fiscal year 2009 was $3.1 trillion, including "one-time" spending. Had his budget been fully enacted, our deficit in 2009 would have been approximately $1 trillion-hefty by any measure. Democrats in Congress, however, only enacted 3 of 12 pieces of appropriation legislation in President Bush's budget. Instead, they waited until President Obama was inaugurated and then pumped President Bush's proposed budget with steroids, increasing spending to $3.5 trillion.
Ultimately, regardless of who is held responsible for the increased spending in 2009, the rate of spending has not returned to pre-stimulus levels. In fact, in fiscal year 2012 it rose to $3.8 trillion. Counting 2009, President Obama has averaged deficits of $1.33 trillion a year. Excluding 2009, President Obama has averaged deficits of $1.3 trillion a year. Not since World War II has the U.S. government spent a greater percentage of its GDP. To put these staggering deficits in perspective, it took the first 205 years of the Republic-from 1776 to 1981-for the federal government to accrue $1 trillion in national debt. At the close of fiscal year 2012, the U.S. national debt was $16.4 trillion, with an additional $2.95 trillion in state and municipal debt to boot.
In 2010, Republicans swept into the U.S. House of Representatives with a perceived mandate to get our nation's fiscal house in order. In late 2010, Congress passed and President Obama signed legislation extending all of the Bush tax cuts for two years with an expiration date of December 31, 2012. In 2011, the federal government's runaway spending butted up against the U.S. debt ceiling. Republicans demanded that an increase in the debt ceiling be met with spending cuts. Ultimately, Congress passed the Budget Control Act which created a "super-committee" designed to reduce spending by $1.5 trillion over a decade. Under the terms of the Budget Control Act if the "super-committee" failed, which it did, that failure would trigger automatic cuts of $1.2 trillion ("sequester") over a decade starting on January 1, 2013. The reference to the "fiscal cliff" refers to the combination of additional taxes as the Bush tax cuts expire and the mandatory, incremental spending cuts of sequester.
If nothing is done to avoid the fiscal cliff, approximately $500 billion in tax increases will take effect in 2013 as: (1) individual income tax rates, payroll taxes, the estate tax, capital gains taxes and dividend taxes go up; (2) certain tax credits are diminished; and (3) the number of taxpayers subjected to the alternative minimum tax increases. Many economists warn that this combination of high tax increases and spending cuts will send the U.S. economy into a deep recession.
President Obama has proposed a "solution" that includes raising taxes on "millionaires and billionaires" that make over $250,000 a year, including small business owners that file taxes as individuals, but retaining current rates for all other taxpayers. Throughout his campaign for re-election, the President frequently referred to the fact that America could not afford tax cuts for the wealthy and that the wealthy needed to pay their fair share. Anecdotally, the President often referenced Warren Buffett's famous proclamation that he pays a lower rate than his secretary. The President's philosophy is errant and as a practical matter will not work.
First, the notion that allowing people to keep what they have earned is an "expense" to the government is fundamentally flawed and inconsistent with economic principles undergirding our nation. My keeping what I've earned is not an expense to the government unless one assumes that what I've earned belonged to the government in the first place. Second, anecdotes aside, the Congressional Budget Office indicates that the top 1% of earners have an effective tax rate of 29% of their income. In contrast, middle class earners have an effective tax rate of 11% of their income. The top 10% of earners pay 70% of income taxes, and no, they do not make 70% of all of the income earned in this country of possess 70% of the wealth in this country (not anywhere close). Third, and perhaps most practically, by the President's own estimate the increase in taxes on those making over $250,000 would generate approximately $80 billion in additional revenue a year. This number assumes that the increase does not negatively impact productivity. However, accounting giant Ernst & Young has estimated the tax increase would lead to 715,000 jobs lost) Of course, even if the increase had no negative impact, $80 billion in additional revenue hardly dents a deficit that was over $1.3 trillion last fiscal year. (It bears noting that throughout our nation's recent history, we have averaged revenues of approximately 18% of GDP, irrespective of the tax rates--even when top marginal rates were nearly 90%. The difference is that the greatest periods of GDP growth have occurred when rates are low and people are left to invest and spend their own earnings.)
In exchange for tax increases on high-income earners, the President has promised compromise on spending. This is not the first time spending cuts have been promised in exchange for higher taxes. If Republicans give and cuts do not come to fruition, it will not be the first time that happens, either. What Republicans would like to see is real reform to the "big three" of Medicare, Medicaid and Social Security. These programs are often thought of as the third-rail of politics because of the ingrained reliance of much of our population on the benefits they provide. However, the truth is that without reform, these programs will not last long.
By 2025, these programs will, by themselves, consume 100% of projected revenues. Social Security is presently operating at a deficit, taking in less social security taxes than it is paying out in the form of benefits. Its $2.4 trillion "trust fund" is nothing more than an "IOU" from the Fed since the government has been borrowing against the fund. According to the trustees report from the Center for Medicare and Medicaid Services, there are 48 million people covered by Medicare, the total number of enrollees is expected to double over the next 35 years, the program will run out of funds to pay full benefits in 2024 (12 years from now) and at current-law levels, the program has $38.6 trillion in unfunded liabilities. Medicaid also represents a huge expense to both the federal government and states and PPACA's (Obamacare) effort to cover additional uninsureds is largely based in the expansion of the Medicaid rolls. At our current pace, by 2037 (25 years from now) we will be spending over 35% of our projected GDP, or nearly twice of historical average for revenue (18% of GDP).
Without a solution that meaningfully addresses our spending trajectory, Republicans should not remotely consider raising taxes to avoid the fiscal cliff. While the fiscal cliff may be painful, the more painful fall will come when our economy collapses entirely under its own weight.
Russell Latino III is a Jackson attorney. Reach him at email@example.com.