Fiscal Cliff basically refers to the economic effects that are likely to arise from the tax increases, reduction in the budget deficit, and underlying spending cuts when the Budget Control Act of 2011 goes into effect at the end of 2012. The changes expected include a 2% tax increase for workers as a result of the stop of the temporary payroll tax cuts, the stop of some tax breaks for businesses, and the beginning of Obama’s health care law taxes, among others. In addition, the spending cuts shall become effective. The main reasons why the tax rates shall rise include the expiry of the provisions of Bush tax cuts, expiry of the tax credits, expiry of alternative minimum tax “patch” and the expiry of the payroll tax cut. Besides, new taxes resulting from the Affordable Care Act shall begin. These shall result in approximately $7 trillion fiscal cliff (Brill). The marginal tax rates are set to increase to higher levels that have not been experienced in over a decade, and spending cuts of about $1.2 trillion is set to take effect (Brill). If not preempted, economists believe that the fiscal cliff would drive the American economy into recession.
It is estimated (by the Tax Policy Center and the Joint Committee on Taxation) that the difference between going over the fiscal cliff and not going over it (i.e. avoiding sequestration and extending all the tax cuts) would result in a total of $536 billion in the 2013 budget (Brill). If the planned spending cuts and tax increases are avoided, the nation’s debt-to-GDP ratio would dramatically rise to 109% of GDP in 2026 and approach 200% of GDP in 2037 (CBO 4). This is not fiscally sustainable. Despite the Bush tax cut, the world economy still collapsed. This clearly tells that tax cut is not the solution. Highlighted hereunder are the possible solutions.
Solutions
The solutions proposed by Republicans and Democrats are surrounded by controversies. While the Republicans claim that increasing taxes on the wealthy, as proposed by the Democrats, would wreck economy, it is clear that cuts for individual and corporate taxes, cuts on government spending, and cuts on the business regulations shall solve the problem since most Americans are currently struggling in order to make a living. Also, extending the Bush tax cuts for couples earning below $250,000 and individuals earning below $200,000, as proposed by the Democrats, shall not provide a long-term solution (Sahadi). When the tax cut is extended for all, as proposed by the Republican, the situation shall be worsened for most Americans except the wealthy and corporate class.
The proposed solution here is that, let the Americans who earn below $250,000 be given a tax credit that is equivalent to Bush tax cut received in 2012 for a period of two years. At the same time, a new simplified flat tax code should be implemented. The tax rate increases with the income i.e. 6% for an income of up to $50,000 per year; 12% from an income between $50,001 and $350,000 per year; and 20% on all income above $350, 000. The only exception should be on the first $25,000 of the income. This shall not only solve the fiscal cliff crisis by ensuring that the federal finances are in good balance as compared to both the Democratic and Republican proposals, but also allow the middle class to have economic stability. The end result is job creation, increased liquidity, and strong foundation for economic growth.
The country has greatly suffered from wealth inequality and the 20% tax would bring some balance. In the last decades, the rich have been getting richer while the middle class and the poor have been struggling mightily to jump off the treadmill, but all in vain (Pizzigati). In the late 1970s, the wage of a CEO was about 30 times that of a typical worker, but today, it’s more than 200 times (Economic Policy Institute). The CEO compensation has grown by more than 725% from 1978 to 2011 while that of the private-sector worker by only 5.7%.
This proposal is better across the board since it protects both the low income earners and the wealthy Americans. First, the proposal protects the low income earners with $25,000 exemption. It also protects the Social Security and Medicare with the 6% tax rate to $50,000. The flat tax rate of 20% on all income above $350, 000 shall not harm the wealthy since it’s basically a reduction from the top effective rate of 35%. Besides, it closes all the loopholes, especially for the U.S. Corporations abroad. U.S. corporations have over $1.6 trillion in profits overseas, and through "territorial" tax system, this money would be free from U.S. taxes (CTJ 1). Under the U.S. corporate income tax, these companies are allowed to indefinitely “defer” paying U.S. corporate taxes on their profits until the profits are repatriated. Through this loophole and other tax credits, thirty of the largest U.S. corporations paid no taxes between 2008 and 2011 on over $160 billion profits abroad. 20% tax on the 30 corporations alone would result in $32 billion treasury revenue. These corporations are capable of paying the 20% tax since they are already paying foreign taxes and other associated expenses. The 20% proposal would eliminate the keeping of profits offshore and paying offshore expenses, and over $1.6 trillion would be repatriated. This would increase the liquidity, promote domestic investments, and create more jobs.
Annotated Bibliography
Brill, Alex. Consequences of Inaction: The Fiscal Cliff and the Looming Entitlement Crisis. National Chamber Foundation, December 13, 2012. Web. December 20, 2012.
In this article, the Author, Alex Brill explains the causes of the Fiscal Cliff and the resulting consequences. He looks at both the short-term and long-term consequences. In particular, Brill examines the impacts of taxes and spending on the Fiscal Cliff, the economic consequences, the consequences of Medicare and Social Security insolvency, and the effects of delaying the crisis. This article gives an in-depth explanation of Fiscal Cliff, thus makes it possible for deriving better solutions.
Citizens for Tax Justice, CTJ. Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore. December 13, 2012.
This article reports how U.S. corporations hold profits overseas and avoid paying corporate taxes. It explains how the corporations might benefit from the “territorial” tax system which would permanently exempt the offshore profits from U.S. taxes. The article is important in determining the best ways of ensuring that the offshore profits are repatriated to build the domestic economy.
Congressional Budget Office, CBO. The 2012 Long-Term Budget Outlook. June 2012. Web. December 20, 2012.
This report gives the analysis and projections of the budget outlook. In the report, the CBO focuses on the long-term budget outlook under two scenarios with different assumptions regarding the future policies that govern the federal revenues and spending. The two scenarios are the extended baseline, and the extended alternative fiscal scenario. In the first scenario, the assumption is that the current laws remain unchanged; while in the second scenario, the assumption is that certain policies continues while others are modified, especially those that cannot be sustained for long periods. The report gives an insight on the impacts of the Fiscal Cliff and how policies can be changed to minimize the impacts.
Economic Policy Institute, EPI. Inequality. The State Of Working America.
This article reports the rising income inequality. It focuses on wealth inequality, wage inequality, and income inequality. The article gives a sense on how rising inequality has been a barrier to middle-class living-standards growth.
Pizzigati, Sam. “Finish This Sentence: The Rich Get Richer ” Inequality, November 18, 2012. Web. December 20, 2012. Web. December 20, 2012
In this article, Pizzigati explains the income inequality in U.S. The author uses evidence from income inequality studies to show that the rich are actually getting richer while the poor get poorer. The article is important in understanding the rising income inequality.
Sahadi, Jeanne. Fiscal cliff: Next president's first big problem to solve. CNN Money, November 6, 2012. Web. December 20, 2012.
Here, the author describes the effects of the fiscal cliff and gives an analysis of Obama’s and Romney’s approaches in dealing with the problem. Sahadi then offers the solution which she calls “the best case scenario.” The solution is basically postponing the fiscal cliff for some short period of time while seeking permanent solution through appropriate policies.
