Fiscal Cliff, Its Challenges and

Fiscal Cliff, its challenges and a proposed solution The financial crisis has driven Obama's government to a fiscal cliff that seems particularly depressing. Come midnight, December 31, 2012, and certain laws are set to change including introduction of a 2% tax increase for workers, elimination of certain tax breaks for businesses, elevation in the alternative minimum tax, elimination of tax cuts from 2001-2003, and the beginning of taxes associated with Obama's health care law. Spending cuts will also go into effect for more than 1000 government programs including the defense budget and Medicare.

The prospects of the fiscal cliff are attractive for few parties outside of Obama himself. It is a concern for investors and the impact on the economy may be huge. We are barely out of one recession, but the CBO estimates that the policies of the fiscal cliff would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy straight into another recession. Simultaneously, unemployment would rise by almost a full percentage point, with a loss of about two million jobs (Kenny, nd).

Dealing with significant unemployment as we are at the moment in conjunction with the imminent problem of hitting the "debt ceiling," the country is ill-prepared for dealing with any 'fiscal cliff'. This essay proposes that tax increase is necessary to pass through this current fiscal crisis and that the government should raise tax not only on all of its wealthy citizens (not just corporations) but also on the middle-class populace.

The Challenges of the Fiscal Cliff When Obama and Romney were running shoulder to jowl for the Presidency; one of Romney's incentives was that he would offer further tax-cuts thereby adding to the generosity of previous presidents. Presidents Clinton, Reagan, Bush and Kennedy all wooed their wealthy populace by slashing tax cuts. Kennedy's major tax cut was introduced in 1964 after his death; it included slashing tax of top earners from 91% to 70%.

New York University economist Richard Sylla, co-author of "The Evolution of the American Economy observed that "Coming at a time of substantial deficit in the federal budget, this was a startling proposal to many observers," but Kennedy's intent was to close the budget gap and to build the economy, and it worked. The economy grew to an average 5.5%, unemployment fell to 3.8%. And the annual deficit shrank to $1 billion from $7 billion as individual income-tax receipts nearly doubled.

Advocates called for more tax-cuts, but Johnson produced tax hikes instead with revenues peaking two years later at $90 billion. The next major tax-cuts were introduced by Reagan who slashed tax of the wealthy form 70% to 20% and the economy boomed with new start-ups and small business expansion. In 1997, Clinton reluctantly signed a GOP tax bill that cut the capital-gains rate to 20% from 28%. This was followed in 2003 by Bush's largest tax cut since Reagan which included dropping the top marginal rate to 35% from 39.6% (Sperry, P (10/17/20).

Given all these tax-cuts from the past, the U.S. today is evidencing a historical low in its tax rate. Tax has never been this low even though WE deficits and long-term spending needs are higher than ever. This supports the observation of the NY Times (November 29, 2012) which pointed out that: Most Americans in 2010 paid far less in total taxes -- federal, state and local -- than they would have paid 30 years ago.

According to an analysis by the New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980. Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85% of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

(http://www.nytimes.com/2012/11/30/us/most-americans-face-lower-tax-burden-than-in-the-80s.html?pagewanted=2&hp&_r=0) The belief of presidents such as Reagan and Bush was that economic growth (spurred by tax cuts in top earners) would lead to the economic distribution. This was called "trickledown economics" which was the controversial belief that tax breaks or other economic benefits provided by government to businesses and the wealthy would benefit poorer members of society by improving the economy as a whole.

The unpredictable side effects included sub-prime mortgage issues and increase in the gap between the rich and the poor, as the economist John Kenneth Galbraith noted, 'trickle down' economics was an old theory. It had been introduced in the U.S. In the past under that name "horse and sparrow theory" where it was asserted that if you feed the horse enough oats some will trickle down to feed the sparrows.

The horse and sparrow theory according to Galbraith was partly to blame for the Panic of 1896 (Galbraith, (February 4, 1982)) Whilst New Zeeland's Labour Party MP Damien O'Connor used even stronger langue and termed it, "the rich pissing on the poor" ((Heather Stewart (July 21, 2012). Meanwhile, a 2012 study by the Tax Justice Network showed that the money saved by tax-cuts on the wealthy does not benefit the economy.

Rather, it sits in tax havens (such as specific state, country or territory) and tends to have a negative effect on the tax bases of the home economy (Heather Stewart (July 21, 2012). President Obama plans to undo all of this. As noted before, his fiscal cliff also includes eliminating the previous history of tax-cuts for the wealthy and hiking taxes for corporations. There are two problems, however. The first, as Grosz (2012) noted is how one defines the term 'rich'; for Obama it was anyone earning more than $250,000 a year.

This leads us onto the second problem which is that although Obama previously committed himself to hiking tax on the wealthy, it seems to be the middle-class who are actually getting the shorter end of the stick since the extreme rich don't make their money from working but rather make it from investments, capital gains and dividends. (e.g. Condon, S. (December 19, 2012)). The Obama Administration believes that economic distribution is more important than economic growth with money being used for "entitlement programs" (social security and Medicare) and infrastructure improvement).

Obama had, originally, insisted that taxes should be increased for anybody earning more than $250,000 whilst money would be spared for the poor. Even the Republicans agreed with this idea. But given this scenario, the wealthy will only receive a gentle lowering in their taxes, whilst it is the middle class who will largely be affected. (Grosz, D. (Dec 19, 2012)). This supports Warren Buffet's saying about how he is paying less income tax than his secretary.

Buffest earned $46 million last year and was taxed a mere 17.7 per cent, while his secretary who earned $60,000 was taxed 30%. Buffet, after all, super rich as he is, is not working. He doesn't need to rely on salaries and wages for his income. After all, he (and others like him) is making his money from investments, capital gains and dividends; making his money while he sleeps. And the Bush Administration accorded extremely low tax cuts to that kind of money treating it even more generously than tax incurred from wage income.

At the moment, Capital gains and dividends are taxed at rates that are as low as 15% (Grosz, 2012). At least, Buffett is honest enough to realize that the Bush tactic was exploiting the poor whilst pandering the rich and that the money, far from being distributed, was being taken from low-earners to benefit the moguls. Mr. Buffet's conclusion was that this "U.S. government policy had accentuated a disparity of wealth that hurt the economy by stifling opportunity and motivation" (the Unofficial Stanford Blog). He is correct.

America isn't the only country with this problem of disparity of wealth. South Korea's budget for 2011 included plans to increase spending by 5.5% to $270 billion. It recorded a government Budget deficit meanwhile that was equal to 2% of the country's Gross Domestic Product in 2011.

In a news report that reminds us of the Obama situation, Reuters (Mon Sep 27, 2010) reported that: "South Korea will slightly raise next year's budget spending to help ensure a recovery in Asia's fourth-largest economy, but it aims to lower the fiscal deficit by targeting higher revenues" (http://www.reuters.com/article/2010/09/28/korea-economy-budget-idUSBJL00207020100928). The objective of the S. Korean government was to narrow the fiscal deficit to 2.0% of the annual gross domestic product in 2011 from a projected 2.7% shortfall in 2010.

In that way, it aimed to raise total revenue by 8.2% to 314.6 trillion won, boost budget spending in research and development by 8.6% to 14.9 trillion won, reduce sales of deficit treasury bonds to 22.0 trillion won, and cut spending on infrastructure by 3.2% to 24.3 trillion won. It aimed to do all of this by hiking taxes in upper earners (ibid.) South Korea's fiscal situation is not much different from that of the U.S. It too had run into a deep recession and too sought ways out of it by considering tax options.

In a similar way, both candidates running for the South Korean presidency in the 2012 presidential elections vowed to "to prioritise "national reconciliation," better "economic democracy" and social welfare" (BBC News (17 December 2012) South Korea's presidential candidates) and to do this via easing South Korea's income gap between rich and poor by adjusting tax burden appropriately. No wonder, that U.S. President Barack Obama congratulated her and stated that he "is looking forward to working closely with her administration on issues of mutual concern" (ibid).

The two nations currently have a lot in common and Ms. Park seems to be treading the path that Obama has in mind. Conclusion Our recent recession goes by various names. It is called, in turn, the Great Recession, the Lesser Depression, the Long Recession, and the global recession of 2009 (World Economic Outlook, April 2012. April 2012. pp. 38), but it actually started in December 2007 and hit the country in 2008. The global recession affected the entire world economy, with some countries suffering more than others.

Obama recently proposed the Fiscal Cliff as partial solution to the Recession and as aid to his Healthcare, but the fiscal cliff may actually aggravate the recession and hinder attempts to climb from it. Obama's intent has been to counteract the 'trickling effect' implemented in the past that was a result of tax-cuts imposed on the super-rich and introduced by the Clinton / Bush / Reagan / Kennedy administrations. These tax-cuts, rather than profiting the poor, as planned only made the poor poorer and.