Fiscal Cliff part one

I usually ease off on reading news stories during the time period between Christmas and New Year’s Day. It isn’t that the news is less important, it is just that I find this an ideal moment to just relax and enjoy quality family time. This year was different. I was focused on the cliff, the ominous fiscal cliff. I had always thought there would be a solution, an acceptable compromise that would unite most Democrats and Republicans, and it came (in the Senate) just as the ball dropped at Times Square. This part of the cliff solution was the easier of the two major parts. There was never a doubt that taxes would rise on the wealthiest taxpayers and there was never a doubt that there would be some greater limits on deductions and exemptions as incomes rose into the uppermost percentiles. The only ultimate surprise is that it took until the last minute (or slightly thereafter in the House) and maybe that wasn’t a surprise at all. Perhaps the give and take on both sides required waiting until the last minute to be acceptable. For Democrats to raise taxes less than they wanted and for Republicans to raise taxes more than they wanted was not pleasing to either party, though it did come together at the end as a well thought out moderate response to the tax side of the equation.

The agreement on taxes also bought time for the other critical aspect of any long term workable solution to be worked through. Sequestrations, which are virtually across the board spending cuts, are delayed for a two month period so that more intentional and surgical but still critical spending cuts can be agreed upon. Spending cuts have always been the more difficult part of any compromise for it requires deciding not only what to preserve but more critically, what to curtail and or what to eliminate. Raising taxes on the most wealthy is easy compared to inevitably alienating a constituency that supports a program that is slated to be diminished or eliminated. And the reality is that virtually every program has such a constituency that will try to convince you that the less important is really the most important (which for the constituency involved, may be completely correct). We all want and need a strong social safety net, and we all want and need a strong level of defense preparedness but clearly there will have to be adjustments in both areas. Social Security and Medicare as well as defense expenditures will all have to be adjusted in some ways. I know that some people will say that we should be able to do more with less or the same with less and note that with proper efficiency that will happen. More than likely, gains in efficiency will be marginal and the result is that we will have to do less with less. And also more than likely, the Federal government will try to force states to contribute more to maintain certain programs, which most states are not easily in a position to do. There will clearly be pain associated with the spending cuts. And yet with scarce resources there are no choices, something has to give.

We have avoided the fiscal cliff for now. But the reality is that all we have done is make some tax cuts permanent and others, on the wealthiest tax payers, have gone back to the levels of the Clinton administration. For those of us who believe in a more progressive tax code, this is progress. However, compared to doing nothing at all (and allowing all tax rates to rise), which I think would have been a serious mistake, the federal deficit has increased further. Therefore, the really hard work still lies ahead and the next sixty days are critical. We need significant spending cuts, which will clearly be painful but are necessary to curb a rapidly accelerating national debt. And just as it would have been inexcusable for Congress and the President to not come to a compromise agreement on taxes, it will clearly be equally inexcusable to not come to an agreement on spending cuts.

Cliff time

Notwithstanding the impact of Sandy, I have much to be thankful for, including this year’s very welcome Thanksgiving Day break. But what I am most thankful for is not yet a done deal but rather a new feeling that suggests we will avoid the fiscal cliff. The meeting a week before Thanksgiving between the Congressional leadership and President Obama seemed to end with a sense on all sides that fiscal disaster could be avoided. In my opinion, there is no choice but to do so, but I am a spectator and Congress and the President are the ones who need to make it happen.

What needs to happen is compromise. There need to be revenue increases and there need to be spending cuts, but there is more than one way of accomplishing each of these necessary goals. Tax rates are at the heart of the issue and key to any compromise. The democrats want a tax increase for the wealthy; the Republicans want no increase in tax rates whatsoever. The magic number, where a tax increase will once again be imposed, has been $250,000 but compromise requires not only a different number but also a different solution. There are such solutions readily available and finding them is not by any means rocket science. The solution needs to be crafted through limiting the deductions, exemptions, credits, and favorable tax treatments that are part of the current tax code. By diminishing tax breaks on the very wealthy, we can have the same effect as tax rate increases would have, all without changing the nominal tax rates.

Spending cuts are also part of any compromise and solution but automatic “sequestration” on January 2nd is not the answer. Here too, we can accomplish what is needed while still minimizing the impact on the key safety net legislation which so many of us value so highly. Dismantling Obamacare is not an option. Our citizens deserve a health care safety net; it cannot be bargained away. But not every expenditure needs to be protected or can be protected. Given the magnitude (half a trillion dollars) of the reductions sought, there may not be time between now and January 2nd for all the changes to be identified. Certainly however we need a major reduction in spending identified by the start of 2013.

Being thankful for something that has not yet happened is always a risk. My feeling that a cliff can be avoided may or may not be correct. Hopefully, it is not based on false optimism generated by the return of electricity. The Congressional leaders and the White House need to keep talking and working until the compromise is complete. And this time we need to hold our public officials completely accountable. If a compromise is reached, we need to applaud their efforts. If the country wins by avoiding a fiscal cliff, we all win. And if the compromise doesn’t happen and we are faced with a recession following a weak recovery, here too our public officials must be fully accountable. Voting them out of office is then the only appropriate response.