December 19, 2014

The Fiscal Cliff Is Almost Everything the Democrats Want

Fiscal Cliff 2012

The so-called fiscal cliff is a series of tax increases and spending cuts bundled into a name to scare people and serve political ends. It is a crisis fabricated 100% by politicians. And avoiding the fiscal cliff is being used hypocritically for additional political gain.

The Democrats prefer much of what the fiscal cliff would mean. They want tax increases in general, specifically on high earners. They campaigned on raising taxes on those in the top two brackets. They act as though the resulting tax increase on the middle class will be catastrophic. But they also argue that these are the tax rates in force during the Clinton administration when the economy did just fine.

During the Clinton years, spending was under control. Regulations were less oppressive. And most importantly, average corporate tax rates around the world were higher than the United States. Since then the world has cut more than we have and left the United States with the highest marginal corporate tax rate in the world.

Obama claims tax increases on the middle class may cause a recession. He has said the taxes on a family of four will go up by $2,200. Meanwhile taxes for those earning over $500,000 will rise $119,878. And those earning over $200,000 will pay an extra $39,880. Obama would have you believe that $2,200 is a fiscal cliff, but $119,878 is just paying their fair share.

Tax hikes on the poor and middle class are minuscule compared to the increases on the most productive small business owners. These are increases in income tax, not wealth. It isn’t even right to say they are tax increases on the rich. Being rich is measured by how much wealth you have, not how much income. It is more accurate to say these are tax increases on the most productive members of society.

Taxes on the most productive often mean taxes on small business owners whose profits flow naturally onto their personal tax returns. These entrepreneurs are the 1 in 20 people who employ the other 19. They use the profits from one business to start another. Most of these expansions cannot be expensed. They require tax to be paid before outlays can be made. Decreasing their profit means fewer investments made in hiring and economic expansion.

Taxing the most productive an additional $119,878 will have a larger impact on the middle class than an additional $2,200. Having a job is more important. Having an appreciating 401(k) retirement fund is more important. And having a growing economy is more important.

The Democrats are using tax increases politically to continue promoting the populist message that the deficit can be solved by tax hikes on the rich rather than spending cuts.

I’ve written in the past few weeks to show that the top cumulative marginal tax on dividends is rising to 74%. And that the rise in the top marginal tax rate on capital gains will stop the flow of capital out of one investment and into another. Obama has repeatedly endorsed these parts of the fiscal cliff.

The second part of the fiscal cliff is the spending cuts that will come about as a result of the sequestration agreement. They include reductions in defense spending that the Democrats have long favored. And they also include paying doctors 30% less for Medicare without any accompanying reduction in the benefits that patients receive.

Much of Obamacare is predicated on the idea that when single payers can negotiate prices, they can dictate whatever payment they want and therefore reduce costs. This monopolistic idea could be put to the test if these Medicare pay cuts are enacted. What’s wrong with paying those rich doctors 30% less for Medicare?

In reality, it doesn’t punish rich doctors but rather those productive physicians who provide valuable services for Medicare patients. Medicare reimbursement is already pathetically low compared to other payments. Many doctors do not accept Medicare patients now. Given an additional 30% reduction, many more will opt out of participating in Medicare.

The fiscal cliff is the platform on which Obama ran for reelection. It includes huge tax hikes on those with high incomes. It demands massive defense spending cuts. And it means paying doctors 30% less for Medicare without reducing any of the benefits. In short, it is the utopian planning world liberals have always wanted. Meanwhile the president’s proposal suggests $50 billion in additional spending and $1.6 trillion in new taxes.

If Congress would just abolish the debt ceiling entirely, we could sail off to Greece.

We are approaching the debt ceiling again. And Democrats are pushing for its permanent removal. But the debt ceiling is the only leverage that Republicans in the House have left to force fiscal responsibility on their spendthrift rivals.

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About David John Marotta

David John Marotta+ is the Founder and President of Marotta Wealth Management, Inc. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

Comments

  1. Andrew Everett says:

    You seem to overlook massive spending increases under the GOP. The Democrats may want to spend, but they also look for revenue and try to balance the budget and reduce the deficit (see Clinton, Bill). Compare that to Reagan and Bushes where the deficits exploded with massive spending increases. They love the Two Santa Clauses theory. And the math shows the largest deficit reduction in history has been under Obama.

    It’s easy to tar the Democrats as the spending party, but history shows they have been far more fiscally responsible than the Republicans.

    I wish we were still in C’Ville so we could debate this all in person. :)

  2. Luis says:
  3. Greg Vermeychuk says:

    The “Fiscal Cliff” is simply the latest and most blatant version of the game which politicians of both parties have been playing for the last 50 years. There is nothing short of term limits, combined with a gold standard, which would impose fiscal discipline upon the bloated pigs at the public trough whom we call our elected representatives.

  4. Andrew Everett says:

    More ammo that tax cuts for the wealthy are not the answer:

    http://livewire.talkingpointsmemo.com/entry/congress-research-arm-stands-by-conclusion-on-tax

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