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Sunday, Dec 09 2012 11:00 PM

GREG McGIFFNEY: Deal or no deal? Maybe we're better off going over the cliff

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    Greg McGiffney

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The relentless message from Washington is that the fiscal cliff is coming and Congress must act immediately -- or else! But rather than blindly worrying about going off this "fiscal cliff," perhaps it is time to investigate what this actually means.

The long-stated desire of the Obama administration is that we maintain the current marginal tax rates for those earning less than $250,000 and to raise the rates on those earning over that. This will automatically happen in a month, as the income tax rates for all taxpayers will jump upward to the pre-2001 level in 2013 if nothing is done.

However, there is also an automatic "sequestration" of about $55 billion from defense spending, and about $55 billion in nondefense spending should there be no agreement between Congress and the administration based upon the last "budget deal" enacted with concurrent authorization for an increase of the national debt limit. Many on both sides of the aisle say this would be a catastrophe.

Looking at the reality of the situation, the real catastrophe ahead may actually be in not allowing this sequestration to occur. Because the path forward afterward is even more problematic without it.

Right now, the federal budget alone is approaching $4 trillion. Revenues coming in are about $3 trillion. That means the government is borrowing $1 trillion every year and adding this to our national debt. The level of national debt is such that the annual interest on this alone is also approaching $500 billion, and this debt service must be factored into the budget each year. Basically, we need to have this amount of sequestration each and every month for at least the next 12 months in order to not have to raise the national debt limit. Anything done with taxes is only secondary to the growing issue of how to keep the federal government from digging an even deeper hole of debt for future generations.

In essence, instead of a budget "deal," the best thing to do may be a budget "no deal." Any short-term pain felt by the almost minuscule amount of reduced federal spending relative to the overall budget will likely be surpassed in terms of long-term gain for fiscal stability that will also keep the dollar strong (which encouraging more savings, makes fixed retiree income more viable, and puts less pressure on entitlement programs to compensate for inflation with substantial cost of living adjustments). Everyone then pays their same "fair share" toward regaining fiscal stability (and sanity). But, if the economy then does not grow as hoped, and tax revenues do not come in as planned, Congress and the administration then would have the added tool of utilizing reductions in tax rates (or even, real tax reform) to stimulate growth. Essentially, "no deal" could be the first step to stop the spending madness. For if the rate of spending by the federal government is not slowed down, we'll see less and less money available to spend on anything else, regardless of how high tax rates are increased.

The fact is, even with sequestration, fiscal stability will not simply come through policies that just go after the "rich" for more tax revenue, while simultaneously continuing to promise that the federal government can provide "magically delicious" spending that will insure prosperity for all. Priorities have to be taken into consideration in terms of federal spending, as when businesses and taxpayers see that sensible prioritization is overcome by political shenanigans and overall economic confidence falls by the wayside. No doubt a certain amount of government spending is implicitly needed in order for society to take advantage of public goods and safety, but a society cannot be infinitely build upon debt and empty promises for tomorrow if it is going to have any chance at long-term viability. For prosperity has never been created through taxation -- it happens in spite of it. And, logically speaking, economic growth must be established to even consider any expansion in government spending; to ignore this is fiscally irresponsible. Or most certainly "voodoo economics.

Greg McGiffney is a Bakersfield businessman, college professor, veteran and taxpayer. Community Voices is an expanded commentary of 650 to 700 words. The Californian reserves the right to edit all submissions for length and clarity.

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