2013 Tax Increases: 4 Possible Solutions to Avoid the Fiscal Cliff

General concern over the fiscal cliff is difficult to ignore, as print and TV media outlets endlessly rehash the related issues and interview the protagonists. No one really knows what will ultimately happen if tax rates increase, cuts are made to social programs, and our armed forces have to make do with less. There are people on both sides of this issue, some predict a recession if tax rates go up, and others say that it is no big deal and may be the medicine our economy needs to recover.

What we do know is that the fiscal cliff is imminent, just a few days way, and our leaders and legislators do not have a clue about how to avoid a crisis. It should be noted that the president did have one good idea, keep a solution simple. Given that five days are remaining and many important players including the president are resting away from Washington, simplicity is the only alternative available. The problem with Obama’s current proposal is that it does not address any conservative requirements.

If Republicans agree to a $250,000 level for the income tax increase (it is highly unlikely they will) and nothing else, how can they be sure Democrats will address the larger problem of spending later? Conservatives can delay the next debt ceiling increase and create another crisis, but Obama also wants a two-year moratorium on this issue. Can Republicans expect action relating to spending in 2013 if they agree to raise rates on those earning $250,000, $400,000, or $1 million or more, and give up any recourse relating to the debt ceiling? No, so it would be unwise to accept these terms.

If Republicans give in to Obama, Congress would continue to ignore the debt issue. Democrats will shut down initiatives to address entitlements, especially the ones that really count (Social Security, Medicare, and Medicaid) and tax reform. The country’s march to economic oblivion will continue as the Obama administration racks up trillions of dollars of new debt.

If estimates of national debt growing to over $20 trillion and possibly up to $30 trillion by 2021 are true, America has little time remaining to make changes. No family or business can spend without regard to its debt, and neither can our country. All the commentary about the U.S. having unlimited debt capacity is crap. The impending debt levels will emasculate this country from every perspective — financially, socially, militarily, etc. Keynesian proponents like Paul Krugman say don’t worry about debt because the country is in a recession. Krugman never offers a plan to stem the tide of deficits, much less pay back debt to a more reasonable level and an acceptable relationship between GDP and total borrowing?

So what’s the solution? Or should I say what might our government do during the next week leading up to the fiscal cliff? Here are four possibilities.

1. Enact a law that extends the sequester for, say, three months. Tax rates stay the same for every American and no spending cuts will be implemented until the end of March. This action would put great pressure on the Washington deal-makers, as both the sequester and the debt-ceiling deadlines would happen at about the same time.

2. The GOP gives in. Republicans can cave into political pressure, give Obama what he wants (including a debt-ceiling extension) and be left with absolutely no power prospectively. This is an idiotic choice for Republicans and highly unlikely to happen.

3. Obama gets a tax deal at $1 million, all other tax rates and tax benefits remain the same (capital gains, contributions, estate taxes) pending overall reform of the tax code. The debt-ceiling issue does not get extended giving Republicans a second chance to obtain needed long-term entitlement cuts. This is the best and most realistic option. It is simple and neither party has an edge politically moving forward. The fiscal cliff would be temporarily averted and no longer be an immediate threat.

4. Nothing happens and we all take a leap into the abyss. Some say it will be no big deal, especially if increased taxes and cuts are addressed soon after the New Year; others say it will spur more skepticism among businessmen and lead to another economic slowdown.

Of course, there are a huge number of other potential bells, whistles, and compromises that could be thrown into the discussions, but not much time to negotiate them.

The ultimate solution to the country’s financial woes is a balance between revenues and spending cuts. Increased revenues will provide only a small portion of what the country needs, unless growth, prosperity, and higher tax revenues are just around the corner. The national debt is going to blast through the $20 trillion mark in the near term. Our debt load is symbolic of incompetence, a dearth of leadership, and a declining culture.