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The Real Fiscal Cliff

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The combination of expiring tax cuts and unemployment benefits, spending cuts, and tax increases — all scheduled to go into effect on January 1, 2013 — has been termed the “fiscal cliff.” To make matters worse, the debt ceiling of $16.394 trillion — the maximum amount of money the government is legally allowed to borrow — may be reached before the end of the year. But all of the handwringing over the deficit, the national debt, and the debt ceiling obscures the real fiscal cliff that Americans are facing.

The Bush-era tax cuts — the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) — lowered the income-tax brackets to 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent, increased the child credit to $1,000, lowered the long-term capital gains and qualified dividend tax rates to 15 percent, increased the Section 179 expense deduction for small businesses to $250,000, and gradually eliminated the estate tax. Under Barack Obama, the Section 179 expense deduction was further raised and the estate tax was reinstated with a $5 million exemption, but the employee share of the Social Security payroll tax was lowered from 6.2 percent to 4.2 percent.

If the Bush tax cuts are allowed to expire at the end of this year, the current six brackets will decrease to five, but with higher rates of 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent, the child tax credit will be cut in half, the long-term capital gains rate will increase to 20 percent, qualified dividend income will be taxed at a rate up to 39.6 percent, the Section 179 expense deduction will fall to $25,000, and the estate tax rate will increase to 55 percent with only a $1 million exemption. Additionally, the Social Security payroll tax rate that was lowered under Obama will return to 6.2 percent at the beginning of next year.

The latest extension of unemployment benefits, as mandated by the Middle Class Tax Relief and Job Creation Act of 2012, is scheduled to expire at year’s end. So unless Congress reauthorizes the Emergency Unemployment Compensation (EUC) program, the unemployed will generally be eligible only for their regular state benefits. Those benefits range from an average of $416 a week in Hawaii to $190 a week in Mississippi.

The Budget Control Act of 2011 set up the Congressional Joint Select Committee on Deficit Reduction (the so-called Super Committee) to produce bipartisan deficit-reduction legislation by Thanksgiving of 2011. Because the committee failed to do that, sequestration (automatic across-the-board spending cuts) is scheduled to take place the beginning of next year.

Among the many tax increases of the Patient Protection and Affordable Care Act (PPACA or Obamacare), two major ones take effect beginning in 2013. First, the employee share of the Medicare tax (currently 1.45 percent) will increase to 2.35 percent on that portion of income that is more than $200,000 for individuals, more than $125,000 for married taxpayers filing separately, and more than $250,000 for married taxpayers filing jointly. And then there is the new 3.8 percent Medicare tax on investment income that will apply to the lesser of one’s net investment income or the amount of adjusted gross income in excess of the applicable thresholds mentioned above.

Now, any tax rate increase — payroll, income, capital gains, or estate — is a bad thing because it allows the federal government to continue to recklessly spend money on its various unconstitutional programs, income-redistribution schemes, foreign wars, and empire building. Likewise, the decreasing of any tax deduction, credit, or exemption is also a bad thing because the end result is that more taxes are taken out of the pockets of Americans and paid to the federal government so it can continue to recklessly spend money on its various unconstitutional programs, income-redistribution schemes, foreign wars, and empire building.

But if going over a cliff is a bad thing, then why is the elimination of extended unemployment benefits and the imposition of spending cuts — minuscule as they are — considered part of the “fiscal cliff”? Abolishing any government program — and especially one that pays people cash — is always a good thing. And short of abolishing a government program, cutting government spending on any program by any amount, even if it is merely a reduction in the projected growth of government spending, is always a good thing compared with the alternative of no cut or an increase.

The expiration of the Bush and Obama tax cuts, the cessation of unemployment benefits, sequestration, and tax increases on the “rich” amount to a mere bump in the road compared with the real fiscal cliff that Americans are facing.

Just before this past Thanksgiving Day, the national debt stood at $16,292,689,481,349.84. Almost four years ago, when Obama took office, the national debt was almost $6 trillion lower. Republicans rightly castigate him and the Democrats for their profligate spending, but that does not mean that they don’t share equally in the blame. It is Republicans who have controlled the House of Representatives for the last two years of Obama’s first term.

And what did the Republicans do when they had control not only of the House, but of the Senate and the presidency as well? They spent and spent and spent, doubling the national debt. At the time of George W. Bush’s first inauguration in 2001, the national debt stood at $5,727,776,738,304.64. At the time of his second inauguration in 2005, the national debt stood at $7,613,772,338,689.34. On the last day of Bush’s second term, the national debt stood at $10,626,877,048,913.08.

But as huge and impossible to pay as the current $16.29 trillion national debt sounds, the real fiscal cliff is even worse.

According to Boston University economics professor Laurence Kotlikoff, using the Congressional Budget Office’s realistic long-term budget forecast (the Alternative Fiscal Scenario), the unfunded liabilities of the U.S. government amount to $222 trillion. That figure is the fiscal gap of the present value difference between projected spending and projected revenue. It doesn’t mean the government will have a shortfall of $222 trillion; it means that the government would have to invest $222 trillion right now in something that will earn a certain positive rate of return in order to meet its future obligations, mainly Social Security and Medicare.

According to Kotlikoff,

The 78 million-strong baby boom generation is starting to retire in droves. On average, each retiring boomer can expect to receive roughly $35,000, adjusted for inflation, in Social Security, Medicare, and Medicaid benefits. Multiply $35,000 by 78 million pairs of outstretched hands and you get close to $3 trillion per year in costs.

And according to the Social Security Administration, more than 10,000 baby boomers per day will become eligible for Social Security benefits over the next two decades.

Clearly, Social Security and Medicare in their present form are unsustainable. The economy will never be large enough, and taxes will never be high enough, to sustain them.

Kotlikoff says it will all come to an end “in a very nasty manner,” with three possibilities:

The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

“Most likely,” he adds, “we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates, and consumer prices.”

The Democrats, of course, as usual, are proposing the wrong solution. “President Obama’s re-election is easy to understand,” says Peter Schiff. “He essentially promised millions of middle- and working-class voters that if he were to be re-elected, they would receive benefits paid for by the rich.” But raising taxes on the “rich” or even confiscating all of their wealth wouldn’t make a dent in the fiscal gap.

But don’t look to the Republicans either. The biggest defenders of Social Security and Medicare are “fiscally conservative” Republicans. In the weeks leading up to the election, one of the major criticisms of the president by Mitt Romney and Paul Ryan was that he was cutting Medicare, not expanding it like George W. Bush did.

The U.S. government was born in debt. It was only briefly in 1835 that America was debt-free. But the national debt is nothing compared to the government’s unfunded liabilities which can never be paid as promised because, as Kotlikoff reminds us, the U.S. government is “bankrupt” and “totally broke.”

But not only can government liabilities not be paid; they should not be paid. Social Security and Medicare, because they are intergenerational, income-transfer, wealth-redistribution programs, are inherently immoral. It is only the libertarians who have the real solution: abolish the programs.

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