Politicians and the media have gotten together to make us believe that we are about to fall off a financial mountain if the President and Congress can not come together on some terribly difficult decisions to save our economy from certain ruin.
We are reminded that by year’s end, the Bush tax cuts put in as a temporary measure to lower rates to historic lows for a few years to grow the economy, will expire. The plan didn’t work and led to high unemployment and enormous deficits and debt.
We are asked to believe that if we return tax rates to 2001 levels, mainly affecting the financial top 2% of families, our economy might collapse. Letting these temporary cuts expire would raise about $230 billion in annual revenue.
We are also being made aware that the temporary one year cuts in FICA deductions of 2% for up to $110,000 in earned income will also reach their end.
We are then asked to believe that if the Bush tax cuts are allowed to expire and we raise an additional $230 billion in revenue, sequestration would automatically kick in reducing defense and discretionary spending cuts by $110 billion. This would be true only if the additional revenues had not been found. But by letting the Bush tax cuts, they would have been found. So sequestration would not occur if the Bush tax cuts expired.
But what if the sequestration did occur? Half the cuts would come from defense. So almost $55 billion out of more than $1 trillion in annual defense spending would be cut and that by reducing the annual increase. This “cut” or reduction in future spending would be a 5% reduction of the current spending level and would mean that future increases would be smaller. Can defense afford to lose 5% of its budget? I think so.
The other $55 would come out of discretionary spending. This part of our budget costs about $750 billion a year. Cutting its growth by $55 billion would mean a 7.5% reduction that should come from eliminating waste and fraud and perhaps eliminating, reducing or combining programs and functions to maximize efficiency and effectiveness. Would that be so bad?
So what is the real fear? As FDR said, it is of the fear itself. If the mainstream media can continue to misinform the public of the possible effects of these budgetary changes, then the population will become frightened and change their behavior, especially their economic behavior. They might shop less and cause employers to lay off workers who in turn will have less to spend and cause the economy to once again decline.
But if it were possible to analyze the entire situation with all the available information, the public might decide that this is not such a calamity and might actually be a good thing.
As I have said before, I believe that the ultimate solution to the revenue side of our nation’s budget equation, is to scrap the federal income tax code with all its deductions, credits and special circumstances all intended to motivate economic behavior. It should be replaced by a simple standard deduction for individuals and couples and a few tax brackets counting all sources of income at their face value. The $200 plus billion additional revenue from this new system would reduce the deficit while also making funding available to address specific economic needs like housing, health care, education, nutrition and environmental protection when and where needed.
I also believe that we would be best served economically and well as militarily if we dramatically reduced our global military footprint. The money we spend on defense could be in this country so that the money is recirculated in our economy instead being lost in another.
And there is so much waste in government. Surely tens of billions of wasteful, unnecessary spending could be eliminated.
But what should we do now that negotiations have broken down? Contrary to media and politicians’ accounts, we don’t have to settle this by the end of the year.
The spending cuts can and will be delayed and families will see approximately $5 to $8 a day less in net income. The extension of unemployment benefits will expire affecting two million former workers who have already gotten a year of benefits.
I predict that what will happen is all Bush tax cuts will end and then the Congress will vote to cut taxes for the middle class minus some of the credits. Long term unemployment will be extended for a period and the payroll tax cut of 2% will finally end meaning the average worker will pay about $2 a day more for their future Social Security and Medicare benefits which in their first year will equal more than all the payments the worker has ever made.
And the economy will rebound.
Then, in two years when the Republicans lose their majority in the House, the Congress can vote to close all the personal and corporate loopholes and develop a truly fair and simple federal income tax code.
The fiscal cliff is all hype as is the Republican party.
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