Reviewing the where and what of the fiscal cliff

With all the talk of a “fiscal cliff”, and the inability of Government to reach an agreement on terms to address – superficially – the national debt and deficit, the question may in fact be what is being spoken about. There is no lack of blame being tossed about, but what is the exact problem, where did it come from, and what is proposed to fix it?

Before any attempt at understanding the stalemate in Government that is currently in place, we must first understand clearly what are the items being discussed. There is huge talk of revenues, and loopholes, and entitlements – but what is that exactly?

Starting at the top, revenues are the funds the U.S. government spends. Since the Government produces nothing, and technically sells nothing itself, the only source of funding comes from taxes. This is not entirely true though, as the Government does also receive funding from 1 other sources primarily – bonds. The bonds are a debt with a specific timeframe, based on the goodwill of the Government to repay with interest funds given to the Government. In the simplest terms, a bond from the Government is an IOU backed by the belief that future payments are possible because of future tax revenue.

Ultimately, taxes are the lifeblood of the Government. Whether corporate or individual, the Government must take in taxes to offset what it spends. A unique ability of a government, as opposed to every business ever in existence, is that government can create money at will and borrow beyond its ability to pay. Thus a government may act in a manner that would bankrupt a business for an almost indefinite timeframe.

So, when politicians speak of “raising revenues”, a popular term, they mean raising taxes. Regardless of the desire to isolate taxes to only those with success (the “rich”) revenues, or taxes, must come from a broad base of the population in order to maintain the Government. Inevitably, “raising revenues” involves more than only the top tax brackets – to varying degrees increases directly or indirectly increase taxes on the whole population.

Which brings us to loopholes. These are legal opportunities to evade taxes. They are created by politicians for the benefit of benefactors to their cause. Both Democrats and Republicans created loopholes for their various supporters (unions, corporations, Hollywood, ect.) and neither group is willing to remove such loopholes completely. This is why the tax code requires ever updating mega-programs for accountants to learn and maneuver through to do even the most simple tax return. Any politician that claims to wish to remove all loopholes, but is unwilling to scrap the current tax system (to be replaced with say a flat tax) is essentially stating that they want to remove the loopholes of their opposing party’s supporters, not theirs.

That explains, in an overly simplified manner, taxes and the tax code. That’s half of the discussion in Government today. The other half is entitlements. Entitlement is defined by Webster’s as:

  • a right to benefits specified especially by law or contract
  • belief that one is deserving of or entitled to certain privileges

    Entitlements, as pertains to the current fiscal cliff discussions, are Social Security, Medicare, Welfare, Food Stamps, Unemployment Benefits and other programs funded by the Government (thus directly by taxes and taxpayers). Every single entitlement paid for by the Government was created by act of law or contract, and have been in existence so long that the general public believe them to be deserved and untouchable. There is no entitlement that is a Right, the difference as example being “…certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

    Government entitlements, individually and in whole, are actually obligations enacted by law and backed by the faith in the Government’s ability to attain future taxes to pay these obligations at specific times. The difference in meaning is not semantic, and was originally drafted to ensure that it would never be so. But politicians are savy, and if its called an entitlement, and treated as one, eventually people will accept it as such.

    Which brings us to the current dilemma.

    The Government has had a debt only since the 1930’s. The growth of debt has increased under every President since that time.
    Gross federal debt - 1930 to 2016projected

    Currently the national debt is $16.4 trillion, with 2012 annual Government spending of $3.5 trillion and revenues of $2.4 trillion. That creates an annual debt of $1.1 trillion currently, and growing. The GDP (total value of everything made and sold in a year) is $15.5 trillion.

    By 2016, assuming non-historic interest rates (historic is 6.25% or 4% higher than 2016 projections), the most rosey unicorn filled projections target a national debt of $18 – $22.8 trillion, Government spending of $3.2 – $4.3 trillion, and a GDP of $17.3 – $19.2 trillion. Revenues are between $3.3 – $3.8 trillion.

    All of that does not include the reductions being discussed in D.C. today. The fiscal cliff will not affect the economy until another 6 years beyond these figures. So what’s the problem?

    First, the Government is always wrong. Politicians invariably promise more than they can accomplish and do less than is possible. An example, but by no means the only case of this, is President Obama on February 23, 2009.

    Interest on the debt in 2008 – $250 billion, as of today that interest is $258 billion. The projections noted above place the future interest rate on the debt at between $338 – $538 billion. The best laid plans of mice and men never were uttered by politicians. So it is almost inevitable that Government spending will maintain current levels if not increase dramatically (which is more likely based on history).

    At the same time, Government is kicking the problem down the road. By the time the current fiscal cliff savings take effect, assuming that a future Government does not do exactly what the current one is doing, the problem of having more debt than can be paid – even by selling every asset in the nation – will be almost exponentially worse.

    So let’s address the questions posed at the start of the article.

  • What is the problem?
    Government spending exceeds the ability of tax revenues, a trend that started decades ago and is projected to continue into the future almost unabated. Debt exceeds GDP, and assuming insanely low interest rates, will continue to grow faster than the ability to reduce it (higher rates alarmingly increase this pace). All the bluster of current discussion do nothing to alter this.

  • Where did the problem come from?
    Politicians, seeking to maintain power, abused laws meant to safeguard the public and assist in times of need, while enshrining these laws to heighten their own political status. This has created a culture of expectations that no political party dares correct.

  • What is proposed to fix it?
    Nothing. Literally the argument is over how best to extend the problem to an unspecific date in the future where someone else will resolve the issue. In fact, the fiscal cliff is the direct result of a superficial attempt to resolve the issue – that was never intended to occur.

    “These automatic and absolute cuts in spending, placed there by law, are already being planned to be rejected. The Washington Post, Fox News, Business Week, USA Today, and numerous other news organizations report discussions in Congress to block or circumvent the laws put in place by this same Congress just months ago.”

    Given this sobering view of the fiscal cliff, both political parties reveal their impotence on what is truly at stake – the viability long-term of the United States. Of course, being honest and stating that the problems will be deferred to the next budget and the next administration and the next generation as usual severely limits electability.

    The reality, to summarize, is not the deficit or the national debt. It’s not the interest rate or how high taxes must go for everyone. The reality is that tenured politicians are addicts, hooked on spending, gifted with the ability to distract and deflect attention away from their collective inefficiency. Until both political parties, and all the elected officials, are held accountable – forced to act in the best interest of the nation, kicking and screaming all the way – there will be no real prospect for a future where our children and grand-children will not be saddled with the burdens of fiscal irresponsibility from today.

    Comparatively the fiscal cliff is like jumping off a stairmaster, with the reality being that you are plummeting down the side of Mt. Everest the whole time.

  • About the Author

    Michael Vass
    Born in 1968, a political commentator for over a decade. Has traveled the U.S. and lived in Moscow and Tsblisi, A former stockbroker and 2014 Congressional candidate. Passionate about politics with emphasis on 1st and 2nd Amendments.

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