Kicking the Can

A couple of hours into 2013, the Senate passed the American Taxpayer Relief Act of 2012 by a vote of 89 - 8. This is the result of compromises between the Senate and the White House that is supposed to avert the looming financial crisis known as the “fiscal cliff”.   After much debate, the House also approved the bill. CNBC’s headline reads With Final Vote, Congress Resolves 'Fiscal Cliff'. Does this legislation really resolve the crisis?

The bill extends tax credits and tax rates for all but those in the highest tax bracket.  It also extends certain tax credits for businesses. The act makes changes to the Alternative Minimum Tax to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills.

However, the measure restores the Social Security payroll tax back to 6.2%.  It raises the income tax rate for individuals earning more than $400,000 and couples earning more than $450,000 from 35% to 39.6% and the tax rates on capital gains and dividends from 15% to 20%.  It also extends the limits on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.  So let’s put a face on this and picture two married doctors with a family of kids headed to college giving Uncle Sam $180,000 of their $450,000 income.  Then subtract living expenses, utilities, mortgage, college tuitions, car payments, homeowner insurance, health insurance, malpractice insurance, etc. out of the remaining $270,000.  Makes all those years of medical school, student loans and sleepless days and nights really appealing right now, right?

According to Foxnews.com, the legislation will raise approximately $620 billion in tax revenue over 10 years.  Yet, the act contains $330 billion in spending, such as $30 billion to extend unemployment benefits for the long-term unemployed, approximately 2 million people, for one year.  Because of the spending provisions in the measure, the net spending cuts amount to $15 billion over 10 years.

The budget deficit has exceeded $1 trillion dollars for each of the last four years, yet Congress and the President managed to cut only $15 billion over 10 years?  Seems to me that President Obama and congressional leaders aren’t serious about reining in the debt, or incredibly bad at math. Either way, the new law isn’t much of a resolution. Nor is it much of a relief to the taxpayer.  An analysis by the Tax Policy Center indicates that 77% of households that actually pay income tax will see a tax increase.   Recall that only 54% of Americans contribute to the tax revenue.

So what did Congress and the President do?  They didn’t resolve the fiscal cliff, they merely postponed it.  Instead of the mandatory, across-the-board reductions in federal spending occurring on January 2, 2013, as required by the Budget Control Act of 2011, the new law merely changed the date these reductions occur to March 1^st. In addition, Congress and the President still must address the debt ceiling issue I addressed in a previous post.  Because Congress has not passed a federal budget in over three years, it has funded government operations through a series of continuing resolutions. The third issue the next session of Congress must address is the current continuing resolution is set to expire March 27^th. 

With these three financial issues ahead of us, sequestration, debt ceiling, and expiration of the continuing resolution, Congress, along with President Obama,  must make some hard decisions, both long term and short term, to get this country back on sound financial footing.  Unfortunately, I don’t see that happening.  As I wrote in a previous post, Senator Reid has been an obstacle to getting budgets passed. During a December 30^th appearance on “Meet the Press”, President Obama said his second priority was to “stabilize the economy.”

 As I said, I don’t think they are serious about reducing the debt or reforming entitlement spending.  But those things must happen or we risk a weaker economy, higher taxes, higher inflation, and higher interest rates.  Erskine Bowles and Alan Simpson, co-chairs of President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform, warned that “the reckoning will be sure and the devastation severe” should the United States fail to “put its fiscal house in order.”

Tell our leaders it’s time for serious solutions.  They keep demanding more and more money from taxpayers without demonstrating fiscal responsibility.  We cannot allow them to continue to kick the can down the street while tossing our money into the wind.  Contact your Senator (www.senate.gov), your Congressman (www.house.gov) and call (202-456-1111) or email the President (http://www.whitehouse.gov/contact/submit-questions-and-comments) and let them know you want fiscally responsible solutions.