The story of the sequester

On Friday, the deadline for the federal spending sequester passed without an agreement between Democrats and Republicans on what portions of the federal budget to cut. Many may wonder exactly what the sequester is and how the nation reached the point where $85 billion will be cut from federal spending with no one in Washington taking responsibility.

The sequester has its origins in the debt limit debate of the summer of 2011. As the nation’s credit rating was downgraded and the federal government neared the end of its ability to borrow, President Obama pressed Congress to raise the debt limit. In exchange for doing so, House Republicans insisted on spending cuts. By 2011, President Obama was spending nearly a trillion dollars per year more than 2008, President Bush’s most expensive year, according to the White House Office of Management and Budget. Nevertheless, President Obama and the Democrats fiercely resisted any attempts to rein in spending. For their part, Republicans were equally tenacious in their opposition to tax increases.

The stalemate was broken by the sequester. According to investigative journalist Bob Woodward, whose book, “the Price of Politics,” details the negotiations from the summer of 2011, the stalemate was broken by an agreement to delay the decision on taxes and spending cuts. Part of the agreement was a “doomsday” plan in which taxes and cuts would automatically take place if Congress failed to take action by January 1, 2013. The combination of automatic tax increases and spending cuts came to be known as the “fiscal cliff.” The compromise was signed into law as the Budget Control Act of 2011.

The 2012 election threw a wrench into the plans of both Congress and President Obama for dealing with the cliff. Both parties expected to win a convincing victory. Neither party expected that the election would end in a stalemate, a continuation of the status quo in which the Democrats controlled the presidency and the Senate and Republicans kept control of the House of Representatives, but that is exactly what happened. The election results meant that the stalemate of 2011 was doomed to be repeated.

The tax section of the fiscal cliff was settled on New Year’s Day with a compromise that raised taxes on upper income Americans and let the payroll tax holiday expire for everyone else in what the Wall St. Journal called the “largest tax increase in two decades.” Part of the tax cliff compromise included extending the deadline to deal with the spending cuts, the sequester, until March 1.

As the deadline for the sequester approached, President Obama and the Democrats reneged on the agreement that tax increases would be balanced with spending cuts. In December 2012, the Republicans offered a tax reform package that would have raised $800 billion in revenues without raising tax rates. The plan would have closed loopholes and eliminated some deductions for the wealthy. Now President Obama, according to Factcheck, wants the revenue package previously offered by Speaker Boehner along with the tax increases that he has already received.

After the fiscal cliff deal, Republicans warned President Obama that they would accept no more tax increases. Mitch McConnell (R-Ky.) wrote in an op-ed on Yahoo, “That debate is over. Now the conversation turns to cutting spending on the government programs that are the real source of the nation’s fiscal imbalance.”

Because the tax increases in January were automatic, the Republicans had no leverage. If they had not compromised with the Democrats, tax rates would have gone up even more and impacted virtually every American. In the sequester, the opposite is true: Spending will be cut automatically if Congress does not act.

President Obama and the Democrats desperately want to avoid any sort of cuts to federal spending. Nevertheless, by tying sensible cuts to tax hikes that the Republicans find unpalatable they have guaranteed that the sequester will happen. There are three possible reasons for this strategy.

First, having agreed to the spending cuts only to get an increase in the debt ceiling in 2011, the Democrats now want to make the cuts as haphazard and painful to American voters as possible. If they can cause pain to the voters and make them believe that the Republicans are responsible, it may give them a victory at the polls in 2014 that will guarantee future tax hikes and avoid any possibility of reining in spending.

Second, Obama undoubtedly expects that if he can force the Republicans to cave into his demands once again that it will further splinter the party. With the Republicans fragmented, demoralized and pointing fingers at each other, it will be easy for Obama to gain new concessions in the future. He will need them. The federal government will reach its debt limit again in a few months.

Third, political observer Dick Morris theorizes that Obama wants the sequester to take effect so that he can blame Republicans for the economic downturn that his policies are causing. Writing in The Hill, Morris notes that Obama and the Democrats have imposed a multitude of new taxes totaling $300 billion. According to an analysis by the Washington Post, the cuts for 2013 only come to $85 billion, 28 percent of the amount that Obama’s tax increases have removed from the economy.

President Obama has attempted to cast the blame for the sequester on Congress, but Bob Woodward who was present during the 2011 negotiations disputes that. Writing in the Washington Post, Woodward described how the idea for the sequester originated with Jack Lew, at the time the White House chief of staff, and Rob Nabors, the White House chief of congressional relations. According to Woodward, President Obama personally approved the plan before it was presented to Senate Majority Leader Harry Reid (D-Nev.).

Woodward reported that representatives of the Obama Administration told him that he would “regret doing this” after he pointed out the inconsistencies in the Obama Administration’s statements. The exchange is detailed in the Wall St. Journal, which also points out that administration officials have attempted to intimidate at least two other journalists who have published stories critical of Obama.

There were several congressional attempts to limit the impact of the sequester. Factcheck agrees that Republicans in the House passed two bills in 2012 that would have replaced the sequester’s defense cuts with entitlement cuts. These bills died in the Senate. In the current term, two bills were proposed in the Senate, but neither passed. A Democratic bill would have replaced the sequester cuts with alternative cuts and more tax increases. The Republican version would have required President Obama to propose alternative cuts without tax increases.

In last days of February, Republicans offered to give President Obama the power to choose which programs to cut in order to mitigate the pain of the sequester. President Obama threatened to veto the bill if it passed Congress, instead opting for the across-the-board, untargeted cuts. The White House told the Defense News, “There is no way to cut spending this dramatically over a seven-month period without drastically affecting national security and economic priorities. Moreover, [it] would explicitly protect pork barrel spending and, in so doing, would reduce the President’s ability to protect national security.”

In reality, even though the sequester cuts almost a trillion dollars from federal spending over ten years, total federal spending will increase even if there is no compromise to avert the cuts. According to an analysis of Congressional Budget Office spending figures in Forbes, the sequester cuts are subtracted after adding in inflation adjustments and spending exempted from the cuts. The result is that spending will increase by $110 billion after the sequester cuts are accounted for.

On Friday, the sequester officially took effect as Obama ordered federal agencies to begin the initial $85 billion in cuts. As the Wall St. Journal pointed out, President Obama may be the biggest loser if Americans find that spending cuts really aren’t so bad after all.

Originally published on Examiner:

http://www.examiner.com/article/week-review-the-sequester-takes-effect?cid=db_articles

Fiscal cliff deal pushes U.S. toward Obama recession

The fiscal cliff deal that House Republicans and President Obama agreed to on New Year’s Day means that a return to recession is almost inevitable. The House voted Tuesday night to approve the deal, officially named the American Taxpayer Relief Act of 2012, which essentially gives President Obama and the Democrats everything that they wanted.

The Wall Street Journal notes that the deal, the biggest tax increase in 20 years, is being cynically spun as a tax cut for the middle class. Nothing could be further from the truth. Even though income tax rates only increase on income above $400,000 ($450,000 for joint filers) there are no tax cuts for anyone and all Americans will pay more in taxes in 2013. Additionally, because joint filers can only earn $250,000 each before the higher rates take effect, the marriage penalty is being returned.

According the Journal’s analysis of the deal, there are a multitude of tax increases that will affect every American, not just the wealthy. The death (estate) tax, which affects many family farms and businesses, will increase from 35 to 40 percent. The capital gains and dividends taxes will rise from 15 percent to 23.8 percent. This includes a 3.8 percent Obamacare investment income surtax. While often associated with the wealthy, the capital gains and dividends taxes affect anyone with a 401(k), an IRA, or any other type of investment. Many countries that compete with the U.S. for international business do not have capital gains taxes at all.

There are also other tax increases associated with Obamacare that will now take effect. The medical device tax is a new 2.3 percent excise tax on medical equipment. There is also an additional Obamacare payroll surtax on incomes above $200,000 ($250,000 for joint filers) of 0.9 percent.

Finally, the payroll tax holiday is expiring. This means that taxes on income up to $113,700 will increase by two points to 6.2 percent. According to an analysis by CBS, this means that a worker earning $50,000 would pay almost $1,000 more in payroll taxes in 2013. According to the Tax Policy Center, the average taxpayer will see an increase of $1,257.

The total cost of the tax increases in the deal is $620 billion over ten years according to Forbes. This represents money that will not be available to small business owners to expand or hire new workers, that families will not be able to spend or save for their own needs, and that will be diverted from wealth-building projects into tax shelters to avoid the new Obama tax increases. As $620 billion exits from the fragile U.S. economy, there will almost certainly be a contraction that will lead to another recession.

New tax increases were unavoidable given President Obama’s reelection and would have been more palatable if they had been accompanied by meaningful spending cuts. Under President Obama, the federal government has run deficits in excess of $1 trillion every year. The so-called emergency stimulus spending has become permanent. Erskine Bowles, Bill Clinton’s chief of staff and head of Obama’s own deficit commission, recently was quoted by the Wall Street Journal saying, “If we're going to raise revenue and if we're going to raise it in any form, then we darn well better cut spending, because spending is the biggest part of this problem.”

So how did the fiscal cliff deal handle the deficit spending issue? Spending and the associated borrowing actually increase under the compromise. According to the Congressional Budget Office, the deal will increase federal spending by $332 billion over 10 years. Deficits are projected to rise by $3.9 trillion. This means that the ballooning federal debt will continue to crowd out private investment and act as a drag on the economy.

The fiscal cliff deal is a clear victory for President Obama and the Democrats and presents the country with the worst of both worlds. Taxpayers and businesses will be faced with massive tax increases in an already weak economy paired with still more increases in federal spending, borrowing and growth of government.

Originally published on Examiner.com:

http://www.examiner.com/article/fiscal-cliff-deal-will-lead-to-the-obama-recession?cid=db_articles

Fiscal cliff poll has good news for both sides

A new poll released on December 10 by Battleground is being touted to show President Obama’s edge in the fiscal cliff negotiations. While it is true that the poll shows that 60 percent of voters favor the president’s plan to raise taxes on Americans who earn more than $250,000, other items in the poll are not as favorable for Obama. Sixty-five percent of respondents also favor increasing taxes on large corporations even though the U.S. corporate tax rate is already the highest in the world.

In the same poll, 69 percent opposed raising taxes on small businesses that earn more than $250,000. The problem is that many small businesses are privately held by individuals who earn more than $250,000.

Seventy-six percent favor cutting government spending across the board, a position that President Obama is at odds with as he tries to negotiate for the ability to unilaterally increase the debt limit to avoid spending cuts. Sixty-nine percent of respondents opposed making significant cuts to the debt limit.

Respondents were evenly split on several issues. There was slight approval (51 percent) for reducing Medicare benefits for wealthy seniors. Fifty percent approve of reducing Social Security benefits for the wealthy. Forty-eight percent want to end foreign aid while 46 percent disapprove.

Obama gets bad marks for his job performance on several issues as well. Fifty-nine percent disapprove of his handling of the deficit and 53 percent disapprove of his handling of the economy. He gets marginal approval (50 percent) for working with Congress, taxes (49 percent) and Medicare (48 percent).

For Republicans, the current battle is largely lost on tax increases even though the wealthy already pay the vast majority of taxes. The challenge is to use their mandate to cut spending and reduce the deficit to force President Obama and the Democrats to compromise on real spending cuts.

 

Originally published on Examiner.com:

http://www.examiner.com/article/fiscal-cliff-poll-has-good-news-for-both-sides?cid=db_articles

Republicans should vote ‘present’ on fiscal cliff

The Republicans face a lose-lose proposition on the fiscal cliff. Even though President Obama ruled out a compromise on tax rates long before the election, a new poll by Battleground released on December 10 indicates that most voters favor raising taxes on Americans who earn more than $250,000 and large corporations. Further, Examiner’s analysis of exit polls showed that a majority of voters favor increasing taxes on the wealthy. These results have been consistent with other polls for some time. As late as yesterday, the president was still indicating his refusal to compromise on tax hikes for the wealthy according to CBS.

Georgia Senator Johnny Isakson is almost certainly right that President Obama does not really care if the country goes over the fiscal cliff. If there is no compromise prior to January 1, then President Obama will get the tax increases that he wants on the wealthy. It is also likely that he will get credit for enacting tax cuts when the Democrats push through a bill to return tax rates to their pre-cliff levels for all but the top income brackets. Republicans will have no choice but to vote for the tax cuts on middle and lower income brackets unless they want to be blamed for increasing taxes.

In essence, it is inevitable that taxes are going up. It is in the Republicans best interests to negotiate a deal as quickly as possible on the best terms possible. Republicans should categorically reject President Obama’s desire to be able to unilaterally increase the federal debt limit. They should also insist on the maximum amount of immediate spending cuts that they can get from the Democrats. Spending cuts should real, not reductions in the rate of increase, and not be future promises.

President Obama and the Democrats will blame Republicans no matter how the fiscal cliff negotiations proceed. If the country goes over the cliff, then they will blame Republicans for being unwilling to compromise on taxes for the wealthy. If the Republicans agree to the tax hikes, then Democrats and conservatives alike will attack them for raising taxes in the next election.

One possible solution is for Republicans to adopt then-Senator Obama’s strategy of voting present. Republicans should get the best deal that they can from the Democrats and then abstain from the vote. The bill will go through because Republicans won’t vote against it, but their fingerprints will not be on any tax increase. If and when the economy slips back into recession because of the president’s insistence on raising taxes, the Democrats will have no one to blame but themselves.

Republicans do hold some cards in the negotiations. Examiner’s analysis of exit polls showed that 74 percent of voters believe that the deficit or the economy was the most important issue facing the country. Sixty three percent of voters opposed raising taxes to cut the deficit. A majority rejected the proposition that the government should do more. Additionally, the middle class voters that the Democrats are holding hostage went convincingly for Mitt Romney.

The Battleground poll also found that voters favor across-the-board cuts to federal spending and oppose raising the Social Security retirement age. They were evenly split on cutting Medicare and Social Security benefits for seniors with higher incomes. Voters still disapprove of President Obama’s handling of the economy and the deficit by large margins. They only agree with him on taxing the wealthy.

President Obama does not have a strong mandate from the 2012 election, but Democrats do hold the presidency and the senate. Elections have consequences. If the Mitt Romney and the Republicans had been elected in greater numbers, America would not have to cope with a tax increase and another likely recession. As things are, the only question is what President Obama and the Democrats will have to give up to get their way.

Originally published on Examiner.com
http://www.examiner.com/article/fiscal-cliff-poll-has-good-news-for-both-sides?cid=db_articles

Obama doesn’t want deal on fiscal cliff

Georgia Senator Johnny Isakson wrote yesterday that he is concerned that President Obama is not sincerely negotiating to avoid the fiscal cliff. The comment, written in Isakson’s weekly newsletter to constituents on Dec. 7, echoed a statement made earlier this week on MSNBC’s Daily Rundown with Chuck Todd.

Isakson wrote, “I am concerned that the president is not acting in good faith and actually wants us to go off the fiscal cliff, let tax cuts expire, cut defense spending and then turn around and cut taxes on just a few later on in order to gain exactly what he has wanted all along while looking as though he has single-handedly rescued the country.”

The senator believes that President Obama and the Democrats are presenting the Republican negotiators with unrealistic proposals in order to force the country toward the fiscal cliff. He believes that the president intends to either force the Republicans to give in to a one-sided deal or simply wait for the automatic tax hikes to take effect. Afterward, the Democrats would attempt to enact new tax cuts for all but the top two percent of taxpayers.

Senator Isakson told MSNBC that he favors an approach that would “raise the base” by “capping itemized deductions at means-tested levels.” Tax reform of this type would increase tax revenue without raising tax rates as wealthy taxpayers would be able to take fewer deductions, leaving them with more taxable income. Isakson says that this was the approach favored by President Obama’s own bipartisan deficit commission.

This sort of tax reform was also used by President Reagan in 1986 in a tax compromise with Democrats. The Tax Reform Act of 1986 lowered the top marginal rate from 50 percent to 28 percent while at the same time eliminating many loopholes and tax shelters. According to historical data from the Tax Policy Center, federal tax receipts increased both in terms of dollars and as a percentage of GDP after the reform.

As support for his position that President Obama does not really want a deal, Isakson cited the fact that Senate Minority Leader Mitch McConnell (R – Ky.) offered Senate Majority Leader Harry Reid (D- Nev.) the chance to vote on President Obama’s proposal. Sen. Reid declined to allow the senate to vote on the measure. The proposal included $1.6 trillion in new taxes and would have given the president the power to raise the federal debt limit without congressional approval. A Republican summary of the president’s proposal provided to Huffington Post also includes an additional $600 billion in taxes effective in 2014, more stimulus spending, an extension to unemployment payments, and a one year deferral of the spending cuts included the fiscal cliff.

Meanwhile, President Obama repeated that he is not willing to compromise on raising tax rates. The president told Yahoo News, “If we're serious about reducing our deficit while still investing in things like education and research that are important to growing our economy - and if we're serious about protecting middle-class families - then we're also going to have to ask the wealthiest Americans to pay higher tax rates. That's one principle I won't compromise on.”

Rep. Tom Price (R- Ga.) had previously pointed out on MSNBC that Congressional Budget Office figures show that Obama’s tax increase would generate only $82 billion per year. According to Price’s figures, this represents just over two percent of the $3.5 trillion 2012 federal budget, enough to fund the federal government for about eight days. The 2012 federal deficit is $1.1 trillion according to the Treasury Department.

The president’s confidence may be the result of two new polls that show that a majority of voters trust the Democrats to make “a good-faith effort to cooperate with Republicans” according to Yahoo News. By almost two-to-one, voters would blame Republicans over Democrats if the country goes over the fiscal cliff.

Originally published on Examiner.com

http://www.examiner.com/article/ga-senator-says-obama-may-not-want-fiscal-cliff-deal?cid=db_articles

America past the tipping point

Father, forgive them, for they do not know what they are doing.

Americans have chosen by a narrow margin not to change horses in midstream. They have given Barack Obama a second chance. Hopefully, Mr. Obama will prove himself worthy of their trust.

It seems that America has reached the proverbial tipping point where there are more takers than people to take from. Under President Obama, 75 people went on food stamps for every single person who got a job according to the Weekly Standard. The growth in the welfare state has been so great and so fast that it can no longer be contained. If the tipping point has not yet been reached, it certainly will have been by 2016.

Having won fewer states and a smaller percentage of the vote than in 2008, the president can hardly claim that the voters have given him a clear mandate to stay the course. Instead they have given him a chance to fulfill the promises of bipartisanship that he made in his first presidential campaign.

Obama’s victory may well say less about the promise of his second term than about the failings of Mitt Romney. Even though he did well in the debates, Romney frittered away much of the summer as the Obama campaign launched endless negative ads against him. Romney had little to say as he was portrayed as an out-of-touch rich guy who strapped his dog to the roof of the car. In the end, it wasn’t enough for Romney to promise a repeal of Obamacare, still hated by a majority of Americans according to Rasmussen, and hope that Obama’s incompetence would speak for itself. Romney was right about the 47 percent. It just turned out to be slightly more than 50 percent.

Perhaps the best thing that can be said about Obama’s victory is that he will be left in office to take the full blame for his failures. The upcoming economic recession or stagnation will not fall upon the shoulders of Mitt Romney, the Republicans, or George Bush. That will be cold comfort for the unemployed and for those who see their incomes lag or wealth deteriorate.

Even though Obama will stay on as president for another four years, he will not have the free reign that he did for the first two years of his first term. He will face a hostile congress where even Democratic senators and representatives distanced themselves from him in the election.

In his first term, President Obama resisted compromise with the Republicans even after the Democrats “took a shellacking” in the 2010 midterm elections. He must change if he wants to move the country forward.

Much of the time, a stalemate in the federal government is a good thing. This year it is not.

The first test of Obama’s second term comes on January 1 when the country reaches the fiscal cliff. President Obama must work with the lame duck congress to fix this problem as soon as possible or the fragile recovery will end abruptly and another, even worse recession will strike the country. President Obama must work with Republicans to avert this fiscal disaster for the good of the country.

In the campaign, President Obama paid lip service to fixing the problem of the federal deficit. We cannot tax our way out of debt. One hundred percent taxes on the wealthy would not fund Obama’s past budgets. If the president is serious about the debt, which is now more than 100 percent of GDP for the first time since WWII, he must agree to cuts in the federal budget as his own deficit commission recommended.

Finally, the most pressing international problem that we face is Iran. Over the next few weeks, President Obama will decide whether to renew sanctions on Iran. If he is serious about preventing Iran from obtaining nuclear weapons, weapons that threaten the U.S. homeland as well as Israel, he should do so. He should also commit to a military option if sanctions do not work and voice support for Israel if they decide to strike. Ambivalence and mixed messages to the Iranian government will almost certainly lead to war.

My concern is that none of this will happen. My concern is that Dinesh D’Souza may be right, that Obama is, at heart, an anti-colonialist who wants to bring the United States down to a third world level. He will continue to mount up federal debt until the economy breaks. He will stand aside as Iran arms itself and turn on Israel when they try to defend themselves.

My belief is that under President Obama, unless Republicans in congress are joined by enough Democrats to stop him, will continue on the same wrongheaded course that he has followed for the first four years of his presidency. If the United States manages to avoid lapsing into another recession or depression, the best we can hope for is to muddle through a Lost Decade of high unemployment, rising energy costs and anemic growth. American influence abroad will wan and with it we will see the rise of dictators and the decline of freedom around the world. At home we will lose more freedom as well, from the freedom to follow our religious beliefs to the freedom to own a gun.

If America has reached the tipping point. This election was our last, best hope to return to prosperity. My children will be left with less freedom, few opportunities, and less hope than I had. I and many others will continue to fight the good fight, but with every election lost, every additional entitlement recipient, every activist judge appointed, the tide is harder to turn back. The Republican Party may never win another major national election. If they do, it will still be impossible to roll back all the damage of the Obama years.

Perhaps Atlas is about to shrug.

Originally published on Examiner.com:

http://www.examiner.com/article/america-past-the-tipping-point?cid=db_articles

Obama rejects compromise to avoid fiscal cliff

Obama Administration officials recently confirmed that President Obama is prepared to veto any legislation addressing the looming “fiscal cliff” that does not accede to Mr. Obama’s demands for tax increases on upper-income Americans. The “fiscal cliff” is a bundle of tax hikes scheduled to take effect on January 1, 2013 unless Congress and the president take action.

On October 17, the Washington Post reported that the president’s plan is to wait until after the election, which he presumes he will win, and use his victory to force the Republicans to agree to tax hikes. Since they took control of the House of Representatives in 2011, the Republicans have allied with the Tea Party to resist calls by President Obama and the Democrats to raise taxes to pay for increased federal spending and deficits.

The congressional stalemate led to the creation of a deficit commission that called for spending cuts paired with tax and entitlement reform. Congress never enacted its own program of cuts so a package of automatic across-the-board spending cuts and tax increases is now very close to taking effect. In addition to dramatic increases on a number of taxes, deep cuts to defense spending and social programs will also take place.

In 2009, President Obama said, “You don’t raise taxes in a recession.” In a Youtube video of the question and answer session, the president continues, “We have not proposed a tax hike for the wealthy that would take place in the middle of a recession…. That would just suck up, take more demand out of the economy and put businesses in a further hole.”

While the recession is technically over, many Americans still feel that the recovery has not yet begun in earnest. Economic growth is barely above one percent and estimates are frequently revised downward after they are issued. Unemployment has ticked down officially, but is still almost eight percent. The poverty rate is up, income is down, and fewer Americans are working now than when Mr. Obama took office. Few would argue that the economy is at a point where it can sustain taking “more demand out of the economy.”

Tax increases in the current economic environment, especially tax increases of the size and scope now being threatened by President Obama, would almost certainly plunge the economy back into a deep recession. The prospect of these tax increases is a large factor in why the economy is not recovering as well as it should. Businesses are waiting to see what will happen over the next year.

The tax increases are not a panacea for the federal government’s debt and spending problem. A report by the Tax Policy Center, a group affiliated with the liberal Brookings Institution, says that President Obama’s proposal “not nearly enough to close the cumulative budget deficit.” This is because the biggest cost from extending the current, Bush-era tax rates comes from protecting the middle class from tax increases. Preserving the upper-income tax rates would only cost an additional $8 billion according to the Washington Post. These figures also do not reflect the negative economic effects of increasing taxes which often lead to lower than expected tax receipts.

Writing in the Washington Times, Rep. Darrell Issa (R-Ca.) pointed out that even confiscating all of the income from the wealthy would not solve the federal spending crisis. “Even if the president took 100 percent of every millionaire’s income,” he says, “that still would leave a deficit of more than a half trillion dollars, and our national debt would remain at more than $15 trillion.”

President Obama’s insistence on tax increases may be his undoing. The economy is unlikely to improve under the threat of tax hikes and Mr. Obama is unlikely to be reelected unless the economy improves. Rasmussen reports that voters favor Mitt Romney over Obama on the economy by 13 points. After the first debate which dealt largely with economic issues, Mitt Romney surged in the polls nationally.

Even if President Obama loses the election, he can still force tax increases on the American people. Since a new president and congress will not be inaugurated until January, the tax hikes and spending cuts will already be law unless Mr. Obama allows them to be stopped in a lame duck session. Chastened by a defeat at the hands of Mitt Romney, it seems that President Obama would be unlikely to make that concession.

This article was originally published on Examiner.com

http://www.examiner.com/article/president-obama-rejects-tax-compromise-to-avert-fiscal-cliff

Why the economy is in trouble no matter who wins the election

The United States might well be headed for a double-dip recession regardless of who wins the presidential election in November. Two years ago, President Obama convened a bipartisan commission to examine ways to deal with the ballooning federal debt. The Simpson-Bowles commission recommended a variety of fixes including spending cuts and tax reform, but Congress and the president could not agree. The result of the stalemate was a compromise in which automatic spending cuts and tax increases were slated to go into effect on January 1, 2013 if Congress did not act. Now, three months away from the deadline, it appears likely that the doomsday plan will become reality.

It has been called “the tax cliff” or “Taxmageddon.” Regardless of the name, the approaching tax increases represent a significant threat to the already fragile economy. According to a new report released this week by the liberal Tax Policy Center, nearly every tax cut passed since 2001 will expire at once leading to double or triple digit increases on January 1. Taxes will go up an average of $3,500. Nine out of ten Americans will see their taxes increase.

First, there is the expiration of the low Bush-era tax rates which will increase income tax rates for almost all Americans. The top marginal rate will increase from 35 to an effective rate of 39.6 percent. Without action from Congress, rates for lower tax brackets will also increase so middle and lower income taxpayers will also see increases. Many Americans who currently have no tax liability would have to start paying taxes again. The marriage penalty would return.

Second, the capital gains tax will increase from 15 percent to 23.8 percent. This is an increase of more than 38 percent. History has shown that the increasing the capital gains tax discourages investment and businesses seek tax shelters to protect their cash. According to the Wall Street Journal, rate reductions in the capital gains tax in 1978, 1981, 1997 and 2003 helped fuel the tech boom of the 1980s and 1990s and spurred the growth of companies like Wal-mart, Home Depot, Apple and Google.

Third, the dividend tax is slated to increase from 15 percent to 43.8 percent, the same rate as ordinary income. This means that the tax rate for dividends is increasing by a margin of 192 percent in spite of the fact that dividends have already been taxed as corporate income. The U.S. corporate tax rate is already the highest in the world. The dramatic increase in the dividend tax will be a shock to the economic system that will discourage investment in American companies.

Finally, the death tax will increase from 35 percent to 55 percent, a 57 percent increase. The increase in the death tax includes a double whammy since, at the same time the tax rate increases, the exemption for gift and estate taxes will be lowered from $5.12 million per person to $1 million. This means that not only do heirs and recipients have to pay a higher rate on gifts or inheritances, but more of the money in question is taxable. The death tax also represents double taxation since money in an estate or given as a gift has already been taxed as income, capital gains, or dividends.

If Mitt Romney wins the election, his tax reform plan calls for lowering tax rates across the board and simplifying taxes by eliminating some deductions that favor certain categories of taxpayers or businesses. Romney would keep the current 15 percent rate for capital gains and dividend taxes and would eliminate the death tax entirely.

President Obama would keep current rates for the middle class and lower income taxpayers, but would increase rates on taxpayers who earn more than $217,000. The president’s plan would also increase taxes on dividends, capital gains, and estates. According to a Wall Street Journal analysis, President Obama would increase the dividend tax rate to 43.4 percent, the capital gains tax rate to 30 percent, and the death tax to 45 percent.

The rub lies in President Obama’s desire to raise taxes on the wealthy to help pay for the increased spending of his administration. Republicans as well as many Democrats believe that increasing taxes would destroy the recovery and plunge the country back into recession. While some Democrats have indicated a willingness to compromise to avoid the tax cliff, others, including President Obama, have drawn a line in the sand against extending the current low tax rates for the wealthy. Some Democrats have even spoken in favor of allowing the automatic tax increases to go into effect for Americans of all incomes.

Most analysts believe that a compromise to stave off the looming tax increases is unlikely before the election. The Republican base will not accede to any tax increases while the Democratic base is adamant about the need to force the wealthy to pay their “fair share.” Fears of alienating supporters mean that neither side is likely to budge until after the results of the election are determined.

Compromise may be elusive even after the election. President Obama will still be president and the Democrats will still control the senate for almost three weeks after the tax increases go into effect. If President Obama and the Democrats win the election, they will not see a need to compromise since they will be able to hold out and then craft their own bill. Likewise, if the Romney and the Republicans win the election, President Obama and the Democrats may see the doomsday tax hikes as their only means of getting the tax increases on the wealthy that they spent the last two years pushing for. If the tax hikes go into effect and the economy crashes, they can blame President Romney and the Republicans who will be taking office just as Americans are feeling the effects of the Taxmageddon.

Recent reports in the New York Times indicate that congressional leaders are hoping to work out a compromise in the post-election “lame duck” session. By then it may too late to avoid much of the damage however. The Washington Post notes that uncertainty and the inability to plan for the future is already having a negative impact on businesses. Investments and expansion plans are being postponed until the true shape of the tax climate can be determined. More and more businesses are deferring investment until after the election or the first of the year, making a significant recovery unlikely for months.

 

Originally published on Examiner.com:

http://www.examiner.com/article/why-the-economy-may-tank-no-matter-who-wins-the-election

Barack Obama’s doomsday tax plan

While President Obama has been stumping for his proposed Buffett Rule, a minimum 30 percent tax on the wealthy, the United States is hurtling toward a combination of tax increases and spending cuts that will automatically go into effect at the end of the year. If Congress does nothing, these across-the-board tax increases will likely cause the already stagnant U.S. economy to slide back into recession. Many economists are calling the looming increases “Taxmageddon.”

The danger is realized by all sides. Ben Bernanke, chairman of the Federal Reserve, recently warned Congress that the nation is “headed for a massive fiscal cliff.” As reported by The Hill, Bernanke said, “Under current law, on Jan. 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.” He continued, “All those things are hitting on the same day, basically. It’s quite a big event.”

The root of the problem lies in the fact that Congress has been solving problems with temporary solutions for years. Some recent examples of this include the vote in 2010 to extend the low Bush-era tax rates for another two years and the extension of the payroll tax cut in February 2012 through the end of the year.

Perhaps the most egregious example of kicking the can down the road was the formation of the super committee on deficit reduction in August 2011. The committee was part of a compromise, the Budget Control Act of 2011, which allowed President Obama to raise the debt ceiling and avoid a federal default without making significant spending cuts. The committee’s job was to find a bipartisan path for deficit reduction, but by November the committee announced that its members had “come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline" according to CNN. As a consequence of the committee’s failure, $1.2 trillion in automatic across-the-board cuts were scheduled to go into effect beginning in 2013.

The problem with these cuts is that they are not targeted to wasteful or unnecessary programs. Because they are general cuts to almost all government programs except Social Security and Medicaid vital programs such as national defense will face draconian cuts unless Congress acts. According to ABC News, half of the $109 billion in annual cuts would come from defense spending. Medicare would also face cuts of up to $11 billion.

The New York Times and the Wall St. Journal provide partial lists of the tax increases that will go into effect on January 1, 2013. These include the expiration of the low Bush-era tax rates which would increase the top individual rate to about 42 percent when the phase out of deductions is included. The capital gains tax would increase to 20 percent from 15 percent today. President Obama’s payroll tax cut for employees would increase by two percent. CBN adds that many temporary fixes, such as those for the marriage penalty and the Alternative Minimum Tax, will disappear at the same time. The child tax credit will be halved from $1,000 per child to $500.

There are also new taxes scheduled to go into effect at the same time. These include provisions of the Affordable Care Act (“Obamacare”) such as an additional 0.9 percent tax on taxpayers earning more than $200,000 and a 2.9 percent tax on investment and interest income.

In all, the Wall St. Journal estimates that investment taxes would see a total increase of about 60 percent within a year. The New York Times notes that the tax increase for a middle-class family earning $50,000 would be almost $2,000. Many low-income families taken off the tax rolls by President Bush’s tax cuts would have to start paying taxes again as well.

The only way to avert the coming catastrophe is for Congress to act. Given the past history of the current divided Congress, action is not likely to be forthcoming before the election. Republicans are willing to reform the tax system, but have proven unwilling to bow to Democratic pressure for tax increases. For their part, the Democrats have proven resistant to the smallest spending cuts even though spending is at record-high levels for peacetime.

If a deal is not made before the election, the matter will go before the lame-duck Congress and, possibly, a lame-duck president as well. If the Democrats lose control of the senate and Mitt Romney becomes the president-elect, President Obama and the current crop of congressional Democrats could still force the nation’s taxes to rise sharply by simply failing to act. The new president and Congressmen would not take office until late January 2013, too late to stop the automatic tax increases and budget cuts.

What this means is that even if President Obama is not re-elected, he can force the country to pay higher taxes simply by doing nothing. At the same time, he could likely avoid much of the blame for his actions. He would be out of office by the time the tax increases were felt and the economy faltered. Aided by the media, he could deny culpability and blame the incoming administration and Congress even though they never had a chance to address the problem.

These tax increases would be far more extensive than the Buffett Rule tax on the wealthy that the president has been pushing. For all the hype, the Buffett Rule would not produce enough revenue to pay for even one percent of President Obama’s federal budget according to an analysis by the Senate Finance Committee. Theoretically, the 2013 tax increases would produce more revenue, but this does not take into account the fact that they would cause the economy to slip back into recession. As profits fall, so would tax revenues.

The longer the delay in resolving the Taxmageddon problem, the more likely it is that the economy will suffer the consequences. Businesses plan investments months or years in advance. If it appears that there will be massive tax increases at the beginning of the year, businesses will defer investments and move money into tax shelters as the date of the tax hikes approaches. This would mean fewer jobs and less spending throughout the economy. The longer Congress takes to address the looming issue of Taxmageddon, the more likely it is that the nation will again face economic hard times, regardless of who wins the election.

Read this article on Examiner.com:

http://www.examiner.com/article/barack-obama-s-doomsday-tax-plan