Last month’s newsletter addressed some of the factors that contributed to the fiscal cliff. This month, we’ll address the same issue, but from a wider lens. While the resolution of impending deadlines is necessary, the more fundamental concern is that the federal government spends more than it collects. What’s fiscally wrong with America is not a looming cliff, but a malady stemming from chronic financial irresponsibility.
As we discussed last month, the federal government has three primary levers at its disposal to address this broader fiscal dysfunction:
- Boost revenue through the type of tax increases or deduction limitations that will not simultaneously contract economic growth to a commensurate degree
- Decrease government spending
- Improve fiscal policy such that the economy grows more rapidly and, therefore, proportional tax revenue increases
All three levers must be utilized correctly and efficiently to create the bright future all Americans want.
On January 2nd, President Obama approved an agreement that called for a range of tax increases and thereby postponed the immediate fiscal cliff. This law increased the tax rate for individuals making over $400,000 per year and for married couples making over $450,000 per year. The latter figure is notably disproportionate, which results in a surprising penalty on marriage.
Most taxpayers, not just the wealthy, will be paying more in federal taxes in 2013 than they did in 2012 due to limitations on itemized deductions, PEP and Pease tax provisions, expiration of the payroll tax cut, and a 3.8 percent surcharge on investment income to fund the Affordable Care Act.
The intent of these initial efforts fits squarely under the first lever. Whether the revenue garnered by these tax increases outpaces any fallout reduction in economic growth remains to be seen, and will be a source of intense scrutiny by economic analysts, pundits, and concerned citizens alike in the months and years to come.
Realistically, however, even rudimentary mathematical analysis shows that the ongoing fiscal malaise in the United States cannot be resolved without utilizing the second lever no matter how much taxes are increased. The federal government must reduce expenditures.
The country’s debt has almost tripled in the past 12 years. Today, at $16.4 trillion, the national debt surpasses the value of all the goods and services the U.S. economy produces in a year. To continue funding government spending, Congress extended the debt ceiling until May 18th. However, it included a provision stating that if both the Senate and the House do not pass a budget by April 15th, members of Congress will stop receiving their salary until which time they do pass a budget. These provisions emphasize creating a forward-thinking fiscal policy that adheres to sensible budgets. They also reinforce the long-term importance of the third lever.
These combined factors suggest that while the country averted the imminent fiscal cliff at the beginning of 2013, the next several months will see significant political wrangling despite the ongoing fragility of the country’s economy. A long-term solution will clearly require effective, smart deployment of all three levers in resolving the fundamental problems that occur when a government spends beyond its means.