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2013-01-15 :: The Fiscal Cliff

Many people are not truly aware of what the fiscal cliff is, although they hear about it almost daily from each side of the aisle as well as the media.  In short, the fiscal cliff is a combination of higher tax rates for all individuals as well as an end to the payroll tax holiday, combined with automatic spending cuts that are based upon debt ceiling agreements from the previous year.  What that all means is simply there will be less money in the hands of the private sector and more money in the hands of the government. 

Most economists believe that if we go off the fiscal cliff,we will push ourselves back into a recession.  The other problem looming is our debt ceiling.  Currently we are 16.3 trillion in debt and our credit limit is 16.4 trillion dollars.  Originally, we were expected to reach the debt ceiling sometime in January but due to the costs of Hurricane Sandy, it is looking like we will reach our limit the last week of December. 

The immediate effect of the end of the payroll tax holiday will be felt as soon as employees receive their first paycheck of the year.  This is one of the most important parts of the fiscal cliff that will affect everyone.  Obviously, if tax rates go up on everyone there will be less spending in the economy.  Spending accounts for two-thirds of US GDP. The unintended consequence would be worsening unemployment which creates a vicious cycle that will hurt our economy for the foreseeable future. 

The President argues that raising rates on top earners alone will solve the problem, but simple math proves that to be a myth.  Raising taxes on the top earners will bring in 82 billion dollars of revenue to the Federal Government, but we spend 1.3 trillion more than we bring in. Simply put: we would now spend 1.2 trillion more than we bring in, that is hardly a solution to our debt problem.

What needs to happen is true government reform.  The Obama administration needs to look at every aspect of our government and trim every ounce of fat that is available.  We need a surplus budget to back our debts.  Government pensions are a perfect example. While it is very difficult to change the current system, all new employees of the federal government should move into 401k plans.  The effect will not be immediate but it would save us in unfunded liabilities for the future. Another fix would be to throw out the tax code and have low tax rates which are understandable but make sense.  No subsidies, no write-offs just a simple small percentage.  There are also many things that could be done on entitlements that will at a minimum buy us time, such as raising the retirement age on social security. But the bottom line is we need to trim the spending by huge amounts.
Whether we go over the cliff or the current administration relies on a Band-Aid approach, the economy will be slowing further next year.  Our best estimate is that our GDP for next year will drop a minimum of .5% from its already anemic growth rate.   We are in trouble and it is time for us to pay the piper, if we continue at this pace, the U.S. will lose all of its clout in the world within a decade or less.  It is time for action and time to tell the truth to the people of this nation and do what is right, not what is politically expedient. 

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