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Fiscal Cliff 2013: Why Entitlement Reform Must Happen Now

If there is one thing we can be sure of relating to the fiscal cliff, it is that rich people will be paying more taxes in 2013. The electorate has given the president a mandate to take more money from the wealthy, and influential billionaires and millionaires have resigned themselves to the fact that they will keep less of their hard-earned income. So let’s get on with it already!

Then, what are the impediments to a deal being struck between liberals and conservatives, you may be asking? Ironically, they will not include any pushback from the affluent. Special interest groups, representing a wide swath of businesses and industries, will create the biggest roadblocks in the coming weeks.

Real estate lobbyists will object to the elimination or decrease in mortgage interest deductions ($609 billion of tax benefits annually) saying it will stifle home sales. Not-for-profit organizations will oppose lower or no deductions for charitable contributions ($240 billion) by warning us that eleemosynary organizations will not be able to meet their mission to help the poor. The securities industry will fight to retain capital gains tax rates ($216 billion) because raising them will stymie economic growth.

The time has come for compromise and capitulation. It appears that Republicans have yet to make up their minds which lobbying groups, and the special interest groups they represent, are going to get hosed in the process to get our financial house in order. So, “no new taxes” is still the mantra even though conservatives understand that this is an impossible dream.

Increasing the tax rates for the wealthy is beginning to look more attractive when compared to draconian cuts in tax benefits being bandied about. Perhaps a 1% increase, not a 3% increase, would be more palatable than losing all capital gains benefits or charitable deductions. But eventually the debate will become a battle between the groups representing various interests.

There are many juicy targets that Congress can select as it searches for $1 to $2 trillion of revenue. They might include the ones mentioned previously as well as untaxed medical insurance (the largest such benefit decreasing tax liabilities by over $1 trillion annually), step-up basis of capital gains at death ($350 billion), deduction of non- business taxes ($292 billion), etc. Congress could also decrease the benefits of corporations keeping cash reserves offshore. The problem is that there are lobbying groups that will fight tooth and nail for every one of these tax bennies.

Another issue that needs to be considered is the outrageous subsidies that accrue to businesses. The most disturbing of them all are oil tax benefits. Energy companies are among the most profitable sectors in the economy. Large integrated oil companies do not need to be subsidized in any way. Outlandish projects that are so popular to congress people in their pork barrel efforts should also end once and for all.

And most important, entitlements need to be reformed. The biggest are, of course, Social Security and Medicare. For sure, millions of Americans depend on these government programs, but, in their current form, the federal government cannot afford them. For years, Social Security and Medicare have been sacrosanct, but with a stroke of the pen, these programs can be tweaked and save the country billions. The most obvious reform is to increase the minimum age to receive Social Security by one or two years.

In previous essays, I have slammed Congress for not eliminating old social programs that no longer meet their original missions. Why isn’t this a worthwhile endeavor given our current financial situation? Why isn’t the IRS hiring more investigators to make a dent in the several hundred billion dollars lost to tax cheaters each year?

Right now our country is being held hostage by stubborn old men and women who are prepared to flush our economy down the toilet if they do not have their way. Ego and ideology are the only impediments to dealing with the fiscal cliff. And, the president better be careful about biting off more than he can chew. Intransigence on his part won’t impact him politically. But, it could affect something dear to him: his legacy. The productivity of this administration and Congress is at stake. If either abandons bipartisanship in the negotiations for arrogance and condescension, the opposition party will shut down the government and we will be in free fall diving into the abyss.

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