Posted: Thursday, December 27, 2012 12:15 am | Updated: 7:04 pm, Wed Dec 26, 2012.
The “fiscal cliff” coming Jan. 1 will test Republicans and Democrats. The November 2012 elections are over, and it is now time for Republicans and Democrats to come together and solve the country’s fiscal cliff dilemma. The huge deficits and accumulated debt incurred by our federal government are coming to a head. If the president and Congress do not reach a compromise by the end of this year, automatic, drastic spending cuts and substantial income tax increases will hit almost all Americans on Jan. 1 to the tune of at least $600 billion, according to the Congressional Budget Office. Economists have repeatedly warned the president and Congress this will tip the country back into a substantial recession, with more unemployment and more job layoffs across the board. The next day after the recent elections, the stock market got clobbered. 401(k) retirement plan balances that most Americans own got whacked, also.Both the Republicans and Democrats are going to have to compromise in order to arrive at a deal that will be good for all Americans. This means tax increases in exchange for spending cuts. Anybody who knows me knows that I do not like tax increases. In fact, I prefer tax decreases. Substantial tax increases mean there will be no meaningful reform or efficiency measures taken on entitlement and other federal government spending programs.
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But in order to reach a deal between the two parties, compromise will be needed at the end of the day. Neither side is going to get all that it wants. In fact, if the president and Congress allow the fiscal cliff to occur, it will be political suicide for all involved. States risk losing billions of dollars in block grants if no fix is found. The cuts will affect state education, police, health care and infrastructure spending. Even if a fiscal cliff deal is reached by the end of the year, our problems will not be solved. Bill Gross, the PIMCO bond guru (with over $1.9 trillion under asset management) has stated the U.S. fiscal cliff is deeper than advertised. “It is a Grand Canyon” rather than just a cliff.
I agree with Mr. Gross. Tax increases on the “wealthy” (those making over $250,000 per year) to the tune of a top tax rate of 39.6 percent instead of the current top tax rate of 35 percent will generate approximately $80 billion, according to most reports I have read. We have more than a trillion-dollar deficit each year, with over $16 trillion in total U.S. debt that’s growing by billions each day. The Fitch Bond Ratings stated “tax increases and spending cuts implied by the fiscal cliff would not fully address the longer-term drivers of higher public spending and the narrow and volatile tax base.” This debt and annual deficits are so huge that there will have to be substantial tax increases and even more substantial spending cuts. A pro-growth economic strategy also must be incorporated into the equation.
One item not discussed very much is the very low-interest rate environment we are in. This has allowed the federal government to borrow billions of dollars at a very low interest expense. These interest rates are at an artificially low rate due primarily to “quantitative easing” by the Federal Reserve Bank. What happens if financial market forces (i.e., global bond holders) propel interest rates higher? The federal deficit will grow even larger, and by a substantial amount. The increased interest payments owed to bond holders will take way from other federal government programs such as defense, education and social welfare programs such as food stamps, Medicare, Medicaid, etc. This, in turn, could produce social unrest such as what we are seeing now in Greece and other foreign countries. This debt accumulation must stop because it is putting our national security at risk.
I do not see how the president and Congress will be able to make a deal by the end of the year on this complicated issue. We are only a few days away from the deadline. I imagine Congress and the president will agree to an extension of the fiscal cliff in order to give themselves more time to reach a deal. In other words, they will “kick the can down the road.”
For the sake of our country, I advise the following:
Republicans and Democrats, start compromising now.
But in order to reach a deal between the two parties, compromise will be needed at the end of the day. Neither side is going to get all that it wants. In fact, if the president and Congress allow the fiscal cliff to occur, it will be political suicide for all involved. States risk losing billions of dollars in block grants if no fix is found. The cuts will affect state education, police, health care and infrastructure spending. Even if a fiscal cliff deal is reached by the end of the year, our problems will not be solved. Bill Gross, the PIMCO bond guru (with over $1.9 trillion under asset management) has stated the U.S. fiscal cliff is deeper than advertised. “It is a Grand Canyon” rather than just a cliff.I agree with Mr. Gross. Tax increases on the “wealthy” (those making over $250,000 per year) to the tune of a top tax rate of 39.6 percent instead of the current top tax rate of 35 percent will generate approximately $80 billion, according to most reports I have read. We have more than a trillion-dollar deficit each year, with over $16 trillion in total U.S. debt that’s growing by billions each day. The Fitch Bond Ratings stated “tax increases and spending cuts implied by the fiscal cliff would not fully address the longer-term drivers of higher public spending and the narrow and volatile tax base.” This debt and annual deficits are so huge that there will have to be substantial tax increases and even more substantial spending cuts. A pro-growth economic strategy also must be incorporated into the equation.
One item not discussed very much is the very low-interest rate environment we are in. This has allowed the federal government to borrow billions of dollars at a very low interest expense. These interest rates are at an artificially low rate due primarily to “quantitative easing” by the Federal Reserve Bank. What happens if financial market forces (i.e., global bond holders) propel interest rates higher? The federal deficit will grow even larger, and by a substantial amount. The increased interest payments owed to bond holders will take way from other federal government programs such as defense, education and social welfare programs such as food stamps, Medicare, Medicaid, etc. This, in turn, could produce social unrest such as what we are seeing now in Greece and other foreign countries. This debt accumulation must stop because it is putting our national security at risk.
I do not see how the president and Congress will be able to make a deal by the end of the year on this complicated issue. We are only a few days away from the deadline. I imagine Congress and the president will agree to an extension of the fiscal cliff in order to give themselves more time to reach a deal. In other words, they will “kick the can down the road.”
For the sake of our country, I advise the following:
Republicans and Democrats, start compromising now.
Bill Hellmann is a CPA and an owner of his CPA firm since 1982. He was the school board president of the Morrisville Borough School District from December 2007 through November 2011. Prior to that, he was the Morrisville Borough controller from 1991 through November 2007.
