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.

Failure

The news from the congressional supercommittee was not surprising.  No budget deal – meaning we now will have an automatic triggering of across-the-board budget reductions.  What a bad decision by our Congressional leaders, what a bad impact for our economy, and what a failure to read the will of the public.

How did we get here?  Clearly, too many lines in the sand.  A reluctance to cut spending coupled with an equally forceful reluctance to increase any tax rates.  Leadership by following a "my way or the highway philosophy."  There are without question some areas in social services, health, and defense where spending reductions should be very measured.  There are also many tax rates that should under no conditions be increased.  But there is also without question justification for some spending cuts and justifications for some tax increases (or loop-hole decreases).

But where we are now, with across-the-board adjustments the default position, is on the verge of doings greater harm to the economy.  With the triggering of across-the-board cuts, spending in areas such as health, research, some kinds of student aid, and even defense all are about to be reduced.  Who loses by doing this, other than those directly involved in these industries?  We all do given the critical nature, the future consequences, and huge impact of the industries involved.   And are we really sure that this budget reduction number even makes sense for the economy or is it another case of a guesstimate by Congress, which can now lead to another line in the sand?

Most of us know that compromise is possible if politics move to the sideline and national interest moves to the forefront.  Most of us also know that the best interests of our economy and our country require compromise.  Will our nation's leaders jeopardize our best interests by cutting without thinking or will our leaders rise to the occasion?  We don't need or want more political rhetoric.  Instead, we need thoughtful solutions to cut the deficit brought about by thoughtful elected officials.  For the current crisis, the last best time is clearly now.

Taxing Higher Education

In a recent Pittsburgh Post-Gazette, there was an article on the very controversial higher education tuition tax proposal put forward by Mayor Luke Ravenstahl.  The proposal as it stands (even though there are now efforts to scrap the proposal) is a one-percent levy on tuition, labeled by the Mayor as a Fair Share Tax and designed to raise $15 million per year.  There is no question that many cities and many states are in difficult financial shape, and unlike the federal government, deficits are not an option.  But in plugging a budget shortfall, the negative impact of any tax increase or spending cut should always be minimized to the extent possible, both in an immediate as well as in a longer term sense.  For example, instituting a tax on preventative health care would be a mistake in the moment and  the future but having that same (or a greater tax) levied on purely cosmetic surgery might be a good luxury tax revenue source.  It should be clear to everyone that creating an added barrier that will prevent some individuals from visiting their doctor is very negative and results not only in more work days lost (impacting business), more costly health care expenses in the future (for the individual, for insurance companies, and for government) and more needless deaths.  On the other hand, reshaping a part of your body or having a tuck here or there (or everywhere) may be desirable and pleasing to the eye but is in most cases purely a luxury purchase  with limited, if any, negative tax consequences.