Conservatives on Capitol Hill, locked in the fiscal cliff hanger, are beginning to realize the reality of an incalcitrant Left with whom they are “negotiating”; namely, they seem altogether ambivalent about the real fiscal impact on the Country. The entire debate is reminiscent of Heath Ledger’s “Joker” character of Dark Knight fame, nose-to-nose with a mob boss in front of a pile of money in Gotham City declaring, “It’s not about the money, it’s about sending a message. Everything burns!”
The reason we are where we are on the vote today is over the false- premise driven outcome in the 2011 Budget Control Act. The Congressional body portended to straddle a mandate of $917 billion dollars of spending cuts over 10 years in exchange for an immediate $2.1 trillion dollar extension of the debt spending limit. Why a false premise? Simply put, the US Constitution does not allow any one Congressional body to dictate to another what they must do. It’s all out of their control to make the promise! It’s like a celebrity promising her newest romantic flame that none of their future children will ever be given a bizarre, shock-inducing name. Chances are the current boyfriend is the flavor of the month and the naming rights for all future child(ren) will be shared with one of a half dozen other commitment-phobic beaus before it’s all said and done. In other words, it’s a polyana-ish notion, largely out of their control at any given moment.
The current drive toward the fiscal cliff is another giant charade in Washington. Exhibit A is the shifting of the goal posts where President Obama’s campaign call for $500 billion dollars in additional taxes on the top wage earners becomes Kid-In-The-Candy-Store Tim Geithner’s request for $1.6 trillion dollars less than three weeks later. The audacity of the request, coupled with $50 billion dollars of new and immediate spending measures and the move to transfer debt limit authorization from Congress to the President himself, prompted even Senate Majority Leader Harry Reid to flatly refuse a vote on the proposal last week.
There are several signals showcasing the lack of earnest among those involved in the fiscal cliff negotiations and the inclination to protect the leverage that tax rates represent to Beltway elitists over the well-being of the Country.
It’s all about the plastic! – Treasury Secretary Geithner’s Administration proposal for a transfer of power on debt limit authorization is very telling. The Federal Reserve announced in the Fall that they would print money, more or less arbitrarily, until they felt the crisis had been “averted”. Where there’s a lender available, there’s always a buyer hungry to apply for the plastic (especially when there’s no need to pull a credit score). When that lender is signaling no credit limit, there’s no accountability for the buyer. Secretary Geithner is simply applying for a credit card with the requisite spending limitations–in other words, none at all. He’s the shopper with the mall catalog in hand who shows up to buy on Black Friday because of the discounts advertised, not because of his actual need for any of the items featured.
It’s not about raising the money (revenues) - According to the Congressional Budget Office, revenues accumulated by raising tax rates from 35% to 39.5% (the pre 2001 and 2003 tax rates) on those making $250,000 a year would add a meager $90 billion annually to the federal coffers. That’s enough to run the Fed for one week (and maybe have enough left over for dinner and a movie…from a Redbox vending machine). It’s not a solution, it’s a token. It’s choking a gnat to swallow a fly. There simply are not enough “rich people” to save the day.
It’s not about economics – In 1954 (when the top marginal income tax rate was 91%) tax revenues averaged $2,600 per person. In 1985, the rate had fallen to 50% and the revenues had risen to $5,700 per person in today’s dollars. Between 1954 and today, with few exceptions, a clear trend shows that higher tax rates produce lower tax revenues and vice versa. The current path to raise tax rates does the opposite of what needs to be done. It’s trying to get in shape and sculpt tight abs by eating everything on the buffet. The point is, you do achieve both — a shape and a tight stomach — just the opposite of what you want!
It’s not about human nature – The late Representative Jack Kemp said it best, “When you tax something, you get less of it.” People respond to incentives. Lower tax rates produce more economic growth and more tax revenue. This is made self-evident by things like the Laffer Curve—what the Left derides as voodoo economics despite its utter vindication by historical reality. If you tax at 100%, no one works and you get nothing. If you tax at 0%, you get nothing. The task of good tax policy is to find the sweet spot on the curve.
The current debate is being driven by political rather than market processes. There are two main outcome scenarios.
Scenario 1) Conservatives give big government advocates the tax hikes on the “wealthy” in exchange for an extension of the existing tax cuts, we avert the fiscal cliff temporarily, middle class folks keep the cuts while unemployment climbs as the higher tax rates siphon off working capital that the so-called wealthy use to generate jobs and economic growth. Despite the tax rate hikes, we dive into a recession based on a complex list of federal regulations and spending initiatives that the rates don’t begin to address. The Left’s message will be straightforward; “conservatives would have sacrificed the nation and caused a recession just to protect the wealthy at the expense of the “middle class”. Conservatives will counter; “top income earners create the jobs with the working capital they use to start businesses. The Left sacrificed economic freedom and caused even fewer jobs to be created with an inconsequential tax hike on job creators that didn’t fix the problem”. When the debt ceiling debate arrives in early 2013, the Left will argue you can’t trust someone who just showed you they protect the wealthy at all costs. Now they’re willing to ruin the economy and send us into a recession for no reason.
Scenario 2) Conservatives dig in and refuse to give big government advocates the rate increases on anyone, regardless of income class, demand spending cuts and refuse to fund budget requests for nonessential government services. The result; we go over the cliff, taxes go up on every income class and we still go into a recession we never really left. The Left will argue, “We tried to keep conservatives from being unreasonable but they sacrificed all of us to protect the rich and now we all have to pay”. Conservatives will counter; “The Left recklessly held the Country hostage over a non-solution and refused to give the middle class a tax cut when it was in their power to do so. We know it’s a non-solution because if taking taxes from all of us still won’t solve the revenue problem, how would raising tax rates on only a few of us have gotten us any closer? Now everyone suffers trying to support a government that’s too expensive.
The gain for economic freedom lovers in this scenario is that the message becomes clear in the midst of the financial pain that we can no longer afford more spending. The House will have the leverage in the argument to begin denying budget requests for the sake of protecting the American people from an even heavier tax burden. When the debt limit arrives under this scenario, the Left will argue that we can’t afford an even worse recession than we already have and we need the flexibility to save the American People from the mess that conservatives created. Conservatives will counter the only way out of the recession is for the government to reduce the burden on the American people and cut itself back, not burden us more in the midst of financial hardship.
There is a formula for the death of economic freedom and it’s all about proverbially “draining the pond“. A loss of local resources (through regulation) equals a loss of leverage and a loss of leverage equals a loss sovereignty and a consolidation of power at the top. In the end, the current frenzied, media-fed cry, “Don’t fall off the fiscal cliff!” is, itself, a series of false premises and a misdirection of scope.
The Bottom Line: A difficult path lies ahead, regardless of the direction. Economic freedom lovers should recognize that the real issue is the spending that is soon to bring a much larger fiscal cliff in the form of crippling regulation, debt obligations and arbitrary monetary stimulus programs. They should hold the line and make the case that the answer is found in lowering tax rates, shrinking government spending and building strong self-supporting local communities. The House should use the power of the purse to force spending cuts by denying nonessential budget requests. We are not in the great fiscal cliff negotiation. We are in the great consolidation negotiation.