Both sides are digging in for a fight.
Emboldened by his class warfare-fueled reelection victory, President Obama is demanding $1.6 trillion in tax hikes as congressional leaders scramble to prevent the country from falling over the so-called fiscal cliff.
In this high-stakes game of poker, Obama is holding fast to his original budget blueprint, which includes $1.6 trillion in new revenue generated by raising taxes on households earning more than $250,000. Obama’s progressive preening comes as the outgoing 112th Congress meets in a lame duck session to deal with unfinished business. At the top of the list are whether the Bush-era taxes rates should be extended and if the $1.2 trillion in automatic cuts approved by the congressional “super committee” on fiscal affairs will be avoided. If current tax rates are not extended, the already fragile economy will almost certainly nosedive.
Together the tax rate expirations and the spending cuts constitute the fiscal cliff, a term coined by Federal Reserve chairman Ben Bernanke, whose protracted cheap money policy has contributed to the nation’s economic doldrums. Unless Washington comes up with a solution, taxes will skyrocket on New Year's Day and the planned spending cuts will take effect.
Although the stock market has been rising since Obama took office, buoyed artificially by the Federal Reserve’s protracted easy money policies, market participants have been signaling that the growing national debt is a huge problem. It now stands at $16.2 trillion and climbing, upon from $10.6 trillion on Inauguration Day 2009.
The U.S. dollar is slowly collapsing, eroding Americans’ purchasing power, and the price of gold, historically a barometer of economic anxiety, has doubled since Obama took office, rising from $853.25 an ounce to $1,710.00 as of yesterday.
But President Obama remains as determined as ever to raise taxes. During a Wednesday press conference, Obama said he will not “extend Bush tax cuts for the wealthiest 2 percent that we can’t afford, and according to economists, will have the least positive impact on our economy.”
In a scene perhaps anticipated by the 1979 book, Drunk Before Noon: The Behind-the-Scenes Story of the Washington Press Corps, Obama called on one of the many friendly reporters in the White House audience, CNN reporter Jessica Yellin.
She threw this class-warfare softball at the president: “Mr. President, on the fiscal cliff, two years ago, sir, you said that you wouldn’t extend the Bush-era tax cuts, but at the end of the day, you did. So, respectfully, sir, why should the American people and the Republicans believe that you won’t cave again this time?”
Of course they’re no longer tax “cuts.” They were enacted a decade ago in 2001 and 2003. They are current law, but journalists like Yellin prefer to call them “cuts” in order to de-legitimize them.
President Obama reassured the doe-eyed Yellin that he would hold fast, explaining that his previous support for extending the Bush-era rates “was a one-time proposition.”
“We cannot afford to extend the Bush tax cuts for the wealthy,” he said. “What we can do is make sure that middle-class taxes don’t go up.” Obama may as well have patted Yellin on the head for a job well done.
At the end of the relatively brief media event President Obama showed off for his adoring fans. To the obvious delight of the White House press corps whose members can be heard laughing in a Politico news video, the president smirked and smiled while refusing to answer what sounded like a meaningful fiscal cliff question shouted by Bloomberg reporter Hans Nichols.
“That was a great question, but it would be a horrible precedent for me to answer your question just because you yelled it out,” Obama said. “So thank you very much, guys.” There was love in the East Room that afternoon.
Economic illiterates on the Left such as the leaders of MoveOn and AFL-CIO’s Marxist president Richard Trumka, are keeping the pressure on Obama. They argue that the cliff is a figment of accountants’ imagination. “What we’re facing is an obstacle course within a manufactured crisis that was hastily thrown together in response to inflated rhetoric about our federal deficit,” Trumka said in a speech yesterday.
If Bush-era tax rates in effect since 2001 and 2003 come to an end as scheduled on Dec. 31, “Taxmageddon” –the largest tax increase in U.S. history— will descend on America. Earners at all income levels will be hit by the fiscal hurricane.
The Heritage Foundation defines Taxmageddon as “a one-year $494 billion tax increase slated to strike the economy” on Jan. 1, 2013 that “is made up of several expiring tax policies and the beginning of some major tax increases from Obamacare.” Taxes will be hiked by $3,800 on the average American household in 2013 alone. Taxes levied to pay for Obamacare will be phased in over the following decade but will begin with a hospital insurance 3.8 percent surtax on income over $250,000. The expiration of Bush-era tax rates will account for a third of the tax increases; a quarter, from the expiration of current payroll tax rates.
Taxmageddon will affect middle- and low-income Americans the most because those two groups received 60 percent of the Bush tax cuts. The “patch” on the Alternative Minimum Tax (AMT) will also expire. Taxmageddon will hurt all Americans because it will retard job creation and wage growth.
The cuts in the fiscal cliff fall heavily on the Department of Defense, which faces an automatic across-the-board cut of a $55 billion a year for 10 years.
During the election cycle, many Republicans assumed a strangely Keynesian posture, attacking the Pentagon cuts because they would eliminate jobs. On the other hand they embraced the Austrian school of economics, applauding possible entitlement and welfare cuts while railing against further economic stimulus packages.
They missed the point. Cutting defense spending is not bad because it will harm the economy. In fact, as Milton Friedman argued, government spending for the most part doesn’t benefit the economy. It is inherently inefficient and wasteful. We spend taypayers’ money on defense because we have to – only the government can fulfill that mission – and not to create jobs. The better argument against defense cuts, one that was heard less frequently on the campaign trail, is that with all the challenges America faces abroad, now is not the time to be cutting back on defense.
There is also the prickly issue of the national debt ceiling. Senate Majority Leader Harry Reid (D-NV) said after the election that if the current $16.394 trillion legal limit on federal borrowing needs to be raised in coming months by another $2.4 trillion, “We’ll raise it,” according to CNSNews.com. Many Republican lawmakers, especially those associated with the Tea Party, have said they plan to fight vigorously against such an increase.
Given the political situation, it seems highly unlikely that any reforms to entitlement programs will come out of the lame duck session. Preventing tax increases seems to be the most Republicans can hope to accomplish in the coming weeks.
The day after President Obama won reelection, Boehner seemed receptive to some tax increases. He said House Republicans were willing to consider “some additional revenues via tax reform.” The successful tax reform compromise of 1986 that President Ronald Reagan reached with a divided Congress could be a model for any tax deal that might be reached, he said. “We’re willing to accept new revenue under the right conditions,” he said.
The Speaker took heat from members of the Republican House conference for telegraphing his strategy early and seeming to wave the white flag.
The next day a chastened Boehner said in a TV interview that “raising tax rates is unacceptable.”
“Frankly, it couldn’t even pass the House,” he said. “I’m not sure it could pass the Senate.”
Since Election Day, Senate Minority Leader Mitch McConnell (R-KY) has come out more definitively against tax increases than Boehner has.
With both sides digging in for a fight, right now the odds seem to favor going over the fiscal cliff. Make sure you pack a parachute because it’s a long way down.
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