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Going over the Fiscal Cliff...

12/21/2012

 
Kevin Spires, CFA, FRM

I have mixed thoughts about the fiscal cliff.  While I think the increase in taxes will result in a lower growth rate in 2013, I do not think it will be a distaster on a level that requires a countdown clock on the business news channels.

Why won't it be a disaster?  The current tax cuts, as structured, did not spur massive economic growth.  The current "stimulus" that will expire did not spur massive economic growth either.  The current tax cuts, because they automatically expired and because spending went up, not down in response, were like an individual increasing their number of exemptions on their W-4 and getting a bigger paycheck, but having a big tax bill due on April 15th.  The weak growth of the past few years can be traced, in part, to the uncertainty created by temporary tax measures.

Spending is what matters - and we will have to increase taxes 2 or 3 more times to catch up to the expected spending that is already on the books in current law.  Obamacare, Medicare, and Social Security will all take increasing proportions of the budget in the next 10-20 years - but there is little support for cutting these programs. Below is some commentary on a recent opinion poll on different options for closing the budget deficit.
Only small slivers of the group of Americans surveyed for a Washington Post/ABC News
poll
released Wednesday said they  support cuts to Medicare and
Medicaid — 21 percent and 30 percent, respectively — and cuts to defense
spending get the support of 42 percent of those surveyed.  Seventy-eight percent
of Americans are opposed to Medicare cuts, while 69  percent are opposed to
Medicaid cuts.

Read more: http://www.politico.com/news/stories/0411/53455.html#ixzz2FhEBrnWd
The message seems to be to never cut spending and only raise taxes on the millionaires and billionaires.  This is a recipe for fiscal disaster.  A country cannot borrow 30% of the money it spends year after year without facing a solvency crisis at some point.

Taxpayers have had a free ride - especially those demanding more government spending.  It has to be paid for and the "Rich" tend to become quite scarce if unfairly targeted.  I am in favor of taxes going up across the board with the message being if you want current spending levels, you will have to pay the price in higher taxes. 

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