The United States is a hard country to love right now. Economic growth has been anemic, too many Americans are looking for work, others are watching their real incomes fall, and the middle class is seeing its purchasing power decline. Income inequality is at historic highs; the ever-widening gap between low wage earners and the few who earn millions has been amply documented.
And if you pay even the slightest attention to the news, between now and the end of the year you will hear the term “fiscal cliff’ until you are numb. The term describes several big events set to occur at the end of this year. But even an agreement to keep us from heading over the cliff won’t do anything about the worst problems plaguing our country.
The end-of-year events include expiration of the Bush-era tax cuts- including current lower tax rates on capital gains, dividends, income and estates- and of stimulus measures, such as the payroll tax cut and extended unemployment benefits. Taken together, more than $600 billion of automatic spending cuts and tax increases will take place if the President and Congress fail to reach a deal before the end of the year.
Spending cuts are scheduled to kick in automatically in January 2013 as a result of the deficit reduction super committee’s 2011 failure to reach agreement. To make matters worse, the nation’s $16.4 trillion debt limit will once again need to be raised early next year.
Failure to find a broad, bipartisan plan to address these issues would throw the economy back into deep recession. The Congressional Budget Office, expressing concern, edged with panic, says that falling off the fiscal cliff will result in gross domestic product falling by 4 percent. With an economy that is only growing about 2 percent annually, a 4 percent cut is nothing to sneeze at. The economy will start down a slope that will lead to a jump in unemployment, increase income and wealth inequalities, and increase the already record number of Americans living in poverty.
With that in mind, the President has been meeting with Congressional, business and labor leaders to develop a consensus over the fiscal impasse and avoid the fiscal cliff.
The short story is that the President wants to raise marginal tax rates on high earners, those Americans making an annual salary of $200,000 or couples bringing in $250,000, and close loopholes. Speaker John Boehner has said he is open to more tax revenues, but not from higher tax rates. He wants to close loopholes and make serious spending cuts. Who knows, maybe they’ll even consider Mitt Romney’s proposal to limit income tax deductions.
We have seen this play before where politicians regale us with lots of rosy rhetoric. In 2011, those same politicians could not reach an agreement to raise the debt ceiling without a broader agreement to cut the deficit and put our fiscal house in order.
So they agreed on the Budget Control Act of 2011, extending the Bush era tax cuts that were due to expire Jan. 1, 2012 and generally kicking the can down the road. The result was the loss of our AAA bond rating with one of the credit rating agencies. If dysfunctional behavior were a crime, American prisons would be overflowing with elected officials.
The President has a strong hand despite the Republican control of the House of Representatives. He can allow the Bush-era tax cuts to expire, the marginal tax rate on ordinary income to increase to 39.6 percent and the maximum capital gains tax rate to rise to 20 percent at the end of the year.
He can then tum around and propose cutting taxes for those earning less than $200,000. After all, raising taxes on high earners was a cornerstone of the President ‘s campaign, and Republicans in Congress are unlikely to vote against tax cuts.
One thing is certain: even though a majority of Americans want their benefits left untouched, they will have to endure cuts in popular expenditures like defense and entitlement programs.
Ad hoc solutions may address the debt and deficit problems, but they don’t do anything about unemployment, wage stagnation and narrowing the gap between winners and losers in American society. Until those problems are addressed, the United States will remain a tough country to love.
originally published: November 24, 2012