Fiscal Cliff 2013: The 10 Biggest Things You Should Know About Taxmageddon

After mocking Mitt Romney’s proposal to decrease tax benefits to the rich in lieu of increasing their income tax rates, Democrats now see the light. But, the job of avoiding the perils of the “fiscal cliff” is still daunting.

All the interested parties are jockeying for position during the congressional lame duck session that convenes this week. The negotiators will rehash the same issues that we heard endlessly during the election campaign. Rep. Jeb Hensarling  (R-TX) tried to be optimistic when he said, “The worst time to work together on a bipartisan basis is right before an election. The best time . . . is right after an election.”

Let’s review the current state of play. The principal concern is the fiscal cliff. On December 31, 2012, if Congress does not resolve its differences, the Bush-era income tax cuts, payroll tax cut, and unemployment benefits will expire. Simultaneously, across-the-board defense and domestic spending cuts will be implemented. By not taking action, most analysts believe the country will go over a fiscal cliff into a new recession.

Democrats want to tackle the deficit with a combination of increased taxes on the rich and spending cuts. Alternatively, Republicans want to focus on spending cuts and an overhaul of the tax code to increase federal revenue, but they will not consider raising income tax rates for any group. The latter position is supported, in their opinion, by the expectation that raising tax rates for Americans will impede the growth of the economy.

During the election, Mitt Romney suggested that Congress reduce the tax benefits to the affluent rather than increasing their income tax rates. By doing so in conjunction with a reformed tax code, Romney said the government’s revenues would increase substantially. At the time, every liberal, including Obama said, “the numbers don’t add up.” Now, some Democrats are reconsidering Romney’s proposal. Perhaps, when they do the math, it will add up. The latest ideas are to limit total tax deductions for the affluent to $35,000 or limit tax deductions to the group at a rate of 28%.

Moving forward, our legislators must find a way to avoid a problem that they created. It is inconceivable that the current group in Congress would manufacture a crisis for themselves in an effort to force Congress to do its job. But, they did, and we are where we are.

What are the objective and subjective issues that must to be addressed to avoid a leap off the fiscal cliff?"

1. Partisanship: Can Congress work together on this issue? Do they hate each other so much that they are willing to jeopardize the country’s financial security? Nothing is going to get done unless the parties sit down together and compromise.

2. Ego: The egos of the president and all of the congressional leaders are front and center. Everyone is concerned with their legacy, position of power in the negotiations, and reelection (except for the president).

3. Who is in control: Really, someone must step up and manage this effort. Ideally, the president should get his hands dirty and exhibit leadership. It would be helpful if Obama took the role of negotiator-in-chief and made this deal happen.

4. Principles: It is frightening to think that our leaders and legislators may use their principles as an excuse for not compromising. Most of the proposals being made are acceptable to some extent, so let’s pick the best ideas and not get caught up in any individual’s invented set of tenets, morals, or standards.

5. Do the math: There seems to be a breakthrough relating to the elimination of tax benefits for the affluent. In an earlier essay, I reviewed the plethora of tax benefits available to Americans. The principal ones like non-taxed medical insurance provided by employers, capital gains rates, estate tax reductions, mortgage interest deductions, and charitable deductions can be reduced in part or in whole for the rich to generate needed revenue for deficit reduction. If the amount generated by these actions is insufficient, then we can discuss a higher income tax rate for the 1%. My calculations at the time indicated great potential for this strategy.

6. Going over the fiscal cliff: Americans should be concerned that our leaders do not appreciate what it would mean to go over the fiscal cliff. Nearly every economist and significant businessperson in the county believes that the fiscal cliff is synonymous with recession. This should drastically increase the urgency of the task at hand.

7. Obama has nothing to lose: This circumstance could cause the president to be accommodative and totally focused on solving the problem as political implications are less important to him. Or, it could make him even more intransient and difficult to work with.

8. Republican bitterness: The GOP lost the election and may be looking for blood. It is in a position to create havoc if compromise is eschewed.

9. The best time to do a deal: As mentioned earlier, tensions should be lower and compromise more possible now that the election is behind us.

10. Insurgency: While most people are working on a compromise, there are others who are intent on killing a new deal and/or emasculating one group or another. Paul Krugman of the New York Times is one such person. Read a recent column of his titled “Let’s Not Make a Deal.” Here is a response to the op-ed by Bob Pisani of CNBC ©.

Once again, the nation is at a crossroads. The voters have spoken and are now out of the picture. Will Congress navigate us around the fiscal cliff? The next few weeks should be telling.