This is the first in a series of posts regarding policy directions for the United States during President Obama's second term. This post concerns the "Fiscal Cliff" facing the nation in January, 2013. The other posts are found below.
Priority #4, Tax Reform
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Priority #2, Reducing the Federal Deficit
http://debatablypolitical.blogspot.com/2012/12/priorities-for-obamas-second-term-2.html
Priority #3, Immigration Reform:
http://debatablypolitical.blogspot.com/2012/12/priorities-for-obamas-second-term-2.html
Priority #3, Immigration Reform:
Priority #1, Tax Reform
President Obama, in his second term, must necessarily focus
on different priorities than his first term.
The president must somehow run the American government in a fiscally
responsible manner, despite the gridlock between the parties in Congress. He must simultaneously deal with a failing
economy, international crises, other pressing domestic issues, and deliver on
the Democratic social agenda.
Cooperation from the
Republican Party, which was totally lacking in Obama’s first term, is essential
to resolution of national problems in his second term. However there is no reason to believe that
the opposition will work with Obama in the second term, any more than in his
first term.
I wonder why Barack Obama wanted this job.
I. Fiscal Cliff:
The “Fiscal Cliff” refers to simultaneous increase of tax
collections and reduction in government spending. The sudden reduction in spending by both
consumers and government is believed to threaten the economy, at a time when
the national unemployment rate is still about 8%.
The situation is like a losing
chess game. You can move the knight, or
you can move the bishop, but in either case you will be checkmated in three
moves. If Federal spending continues
unchecked we will soon face the same debt crisis seen today in Europe. If taxes are raised or government spending is
cut, the frail economy will fall into recession. There is no winning move.
The “Bush Tax Cuts” were originally
enacted in 2001 and 2003, and were extended as an economic stimulus in
2010. These are now set to expire on
December 31, 2012. A temporary 2% reduction
in Social Security tax is also set to expire.
The expiration of the low tax rates
would mean an additional 500 billion dollars in tax receipts, or about 20% over
current collections. The mandatory spending
cuts are relatively trivial, amounting to 110 billion, or about a 3% savings
out of a budget that is running 50% over tax receipts. A large part of the non-defense spending
comes as a cap on Medicare spending.
If all tax and spending changes
occur as currently scheduled, 641 billion dollars of deficit spending remain,
according the Congressional Budget Office (CBO) baseline projection.
http://www.cbo.gov/publication/43539 (Excel table).
Projections by the CBO indicate that ”going over the cliff”
(allowing automatic tax increases and spending cuts to occur) may be best for
the long-term health of the nation. However,
the cost of a recession in 2013 is politically unacceptable to either
party. Obama and Congress
must work quickly to adopt a solution which will maintain the strength of the
economy without sacrificing the country’s long-term financial position.