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The Fiscal Cliff. A host of harsh, sudden, and all-encompassing tax hikes and spending cuts set to go into effect on January 1st, 2013.

We are only three weeks away from diving head-first off the Cliff with little hope of a viable long-term solution to avert it and tackle our debt and deficit problems.

And as we meander towards the edge, we find ourselves watching helplessly as the President and House Speaker John Boehner work to find common ground that can simultaneously pass muster with the House GOP majority without turning away Senate Democrats.

The media focuses in on procedural matters and kabuki theater. The Chris Matthews and Sean Hannity's of the world work themselves into a frenzy over the need to raise or maintain tax rates on the top 2%. The left argues that we have a revenue problem while the right says its a spending problem.

One thing that players on both sides seem to agree on is that the Bowles-Simpson plan provides a strong, bi-partisan outline for smart solutions to fix our deficit and debt.

If that's the case, why haven't we gone ahead and implemented it? If a plan exists to simultaneously avert the Fiscal Cliff and put us on a long term path to fiscal sanity that has fans from both sides of the aisle, why isn't it the law of the land?

Two reasons:

1.) Many of the advocates of Bowles-Simpson seemingly do not know or care to understand the details of the plan they allegedly support

2.) While it is popular to advocate for the solutions the plan presents in theory, they represent a sort of bad tasting medicine. While they might heal us of our problems in the medium-to-long run, the solutions force us to make difficult and painful decisions that few politicians want to stand behind

You can see this by watching just about any serious Sunday news program. From pundits who make their rounds and are most at home on shows like NBC's "Meet the Press" or ABC's "This Week," where there is no accountability for the things they say from show to show. They don't necessarily know about the details of the Bowles-Simpson plan because they don't have to. All they need to know is that it's "bi-partisan" and provides serious specifics. It's incredibly lazy, but there's no real incentive for them to do any better when they'll be invited back to these shows agin and again.

Now, I'm sure no one reading this is under the illusion that talking heads on cable news are worth much of anything. With that said, I do think it's easy to fall into the trap of supporting something like Simpson-Bowles because of its nature. After all, it was a bi-partisan commission put together by President Obama whose membership included GOP Budget king Paul Ryan.

Why don't we take a look at some of the major ideas put forth in ongoing negotiations between Obama and the house Republicans and then let's see how they compare to the Bowles-Simpson plan. That way, we can evaluate the plan objectively and gain an understanding as to why it represents tough medicine that few politicians are actually willing to get behind.

First, let's look at some of the specifics in President Obama's plan:

  • Obama's offer seeks to let the Bush tax cuts on top earners lapse, bringing back the top rates from the Clinton years, while making permanent the tax cuts for all other brackets
  • Furthermore, he wants to let the capital gains rate slide back to 20% (from its current level of 15%.) And, shockingly to many, his fiscal cliff offer includes letting dividends be taxed as ordinary income.
  • Additionally, he seeks a number of stimulus measures, including increased infrastructure spending and the continued extension of unemployment insurance

Now, let's have a look at the GOP counter-offer:

  • $800 billion through pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates, similar to the plan put forth by Mitt Romney during his Presidential campaign
  • $1.4 trillion in savings from spending cuts — including healthcare reforms that could include raising the Medicare retirement age and asking wealthier seniors to pay higher Medicare premiums
  • Limiting the cost-of-living adjustments associated with Social Security payments to beneficiaries

So, how do the details of Bowles-Simpson compare? Let's have a look:

  • B-S seeks pro-growth tax reform (lower rates, fewer deductions), but only after first letting the tax rates rise on income over $250,000
  • It includes $2.9 trillion in spending cuts and $2.6 trillion in tax increases. A nearly 1:1 ratio between spending cuts and tax increases
  • Simpson-Bowles taxes capital gains and dividends as ordinary income. This is more progressive than Obama's offer
  • Regarding Social Security - it proposes raising the taxable income ceiling to 90% of all income, an incredibly progressive proposal. It also proposes slowly raising the retirement age to 68 in 2050 and 69 in 2075.
  • It proposes defense cuts in line with, if not steeper than, the cuts scheduled to take place as part of the fallout of the Fiscal Cliff

When you start to look at the details of Bowles-Simpson, it becomes pretty clear why it hasn't been enacted. Not because it wouldn't help fix our problems, but because so many specific parts of it are seen as non-starters to so many different interest groups. It becomes a problem of people not being able to see the forest for the trees.

Taxing dividends and capital gains as ordinary income is absolutely unacceptable to the GOP. Hell, taxing dividends as ordinary income is unacceptable to senior citizens regardless of party. And while Democrats might be bullish on defense cuts, they almost unanimously agree that the cuts that will go into effect if we go off the Cliff are too severe. Even if they like the ideas in the abstract, they realize that thousands of jobs are created and sustained through defense spending. Because different aspects of the plan are painful to different groups, there is no way for it to get the momentum and support it needs to be implemented.

As far as I'm concerned, the time for this sort of thinking needs to be tossed aside. No one, no one wants to pay higher taxes. Certainly no one reading WallStreetOasis. And no one necessarily wants to shock the economy with brutal spending cuts. But, we are coming to a head. A crossroads where we either need to act now, or face far more draconian taxes and cuts down the road.

Like Eddie, I think that there will be some sort of deal. I'm also fairly sure that whatever deal is made, it'll only act as a band-aid for a shotgun wound. Rather than taking serious steps towards fixing our problems, we'll continue to kick the can down the road. I have no real reason to believe that Bowles-Simpson will be anything more than a prop for pundits to trot out on cable news shows. Knowing that, I'd rather us go over the cliff than do anything else. And, while I don't believe in any sort of "class warfare," I do think we're all in this together. For the better part of a decade, we binged on debt. Individuals racked up credit card debt and borrowed against their homes to keep up with the Joneses. The Federal Government passed major entitlement programs and massively ramped up defense spending without any feasible means of paying for any of it. At this point, I have trouble feeling sympathy for any individual parties involved in the negotiations. We need to fix our fiscal problems before it's too late, and if that means some short term pain for everyone, then so be it.

::steps off soapbox::

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What does WSO think? Any other Bowles-Simpson fans here? Anyone else who wants to Cliff Dive? Leave your thoughts in the comments.

2

Comments (12)

  • mikesswimn's picture

    TheKing wrote:
    We need to fix our fiscal problems before it's too late

    From what I'm looking at, it's been too late for a while now. But, that's just my opinion and I'm something of a pessimist. That being said, what do you think "too late" will look like?

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • In reply to mikesswimn
    TheKing's picture

    mikesswimn wrote:
    TheKing wrote:
    We need to fix our fiscal problems before it's too late

    From what I'm looking at, it's been too late for a while now. But, that's just my opinion and I'm something of a pessimist. That being said, what do you think "too late" will look like?

    It's not too late yet, we can make changes to programs to save them in one form or another.

    Too late = Complete societal collapse. Complete end of social safety nets, people literally doing anything to survive. I mean, just look at what happens across the country on Black Friday. Now, imagine how people would act if they were just as desperate for food and healthcare as they are for useless trinkets when they're on sale.

  • In reply to mikesswimn
    Amphipathic's picture

    mikesswimn wrote:
    TheKing wrote:
    We need to fix our fiscal problems before it's too late

    From what I'm looking at, it's been too late for a while now. But, that's just my opinion and I'm something of a pessimist. That being said, what do you think "too late" will look like?

    IMO, 'too late' is when more than half of the citizens in a democracy want the gov't to provide them with stuff paid for by others. Looks like we are almost there.

  • In reply to Amphipathic
    TheKing's picture

    Amphipathic wrote:
    mikesswimn wrote:
    TheKing wrote:
    We need to fix our fiscal problems before it's too late

    From what I'm looking at, it's been too late for a while now. But, that's just my opinion and I'm something of a pessimist. That being said, what do you think "too late" will look like?

    IMO, 'too late' is when more than half of the citizens in a democracy want the gov't to provide them with stuff paid for by others. Looks like we are almost there.

    It's honestly already higher than that given that home ownership is subsidized via the mortgage interest deduction. We essentially subsidize McMansions. Welfare programs come in many shapes and sizes and go by many different names.

  • In reply to TheKing
    Amphipathic's picture

    TheKing wrote:
    Amphipathic wrote:
    mikesswimn wrote:
    TheKing wrote:
    We need to fix our fiscal problems before it's too late

    From what I'm looking at, it's been too late for a while now. But, that's just my opinion and I'm something of a pessimist. That being said, what do you think "too late" will look like?

    IMO, 'too late' is when more than half of the citizens in a democracy want the gov't to provide them with stuff paid for by others. Looks like we are almost there.

    It's honestly already higher than that given that home ownership is subsidized via the mortgage interest deduction. We essentially subsidize McMansions. Welfare programs come in many shapes and sizes and go by many different names.

    EDIT: I absolutely agree, and corporate welfare (like crop insurance for folks like Monsanto) is just as pernicious as well.

  • TechBanking's picture

    Could someone explain to me why not raising the age for social security and Medicare is such a sacred cow to the Democrats? This is something that must be done, and it doesn't seem to be that big of a sacrifice to ask people to make. Life expectancy is rising so shouldn't retirement age be rising as well? I personally believe we should up the retirement age to 70. I'll be working in some form or another as long as I physically can - I guess the majority don't share this view.

    Is it because the "rich" have the means to retire before receiving their SS checks?

  • In reply to Addinator
    TheKing's picture

    Addinator wrote:
    I'm a proponent of going head long off the cliff. Let everyone feel the pain of higher taxes and let's start raising the question of how much we want the government to provide us rather than this silly pandering where we have to find revenue to pay for too much government spending. It's really a philosophical, directional issue as much as it is numbers. It's why I'll never be for ridding ourselves of the debt ceiling. It pushes the burden of proof on those who with to spend more and take on further debt.

    Most of this debate misses the whole point anyway that most of these cuts and revenue raises are simply to keep the deficit from ballooning at a higher pace. Whenever I hear someone quote a number like 800 billion I go who gives a shit? That's probably over ten years so 80 billion a year in cuts. Woooo! That's a rounding error. It barely even touches the deficit we run every year much less put a dent in the actual debt we already owe. I seriously want to throw up at the mere thought of increased stimulus spending when you look at the numbers, or any further spending at this point. If I thought there were real, tangible spending cuts coming I wouldn't mind but at the end of the day it's another black hole of spending.

    Great post.

    I think what people need to realize is that the "prosperity" that we experienced from the 1980s through 2008 wasn't as real as we thought. People lived so far beyond their means (via debt), just as the government did, and much of our growth was driven by consumer spending that was out of touch with reality and could not feasibly continue into perpetuity (which is what many seemed to believe.)

    In reality, we all just need to learn to live within our means. I actually am a big fan of societal safety nets and some sort of universal healthcare, but I'm not a fan of a keeping up with the joneses mentality. Someone might fall ill due to no fault of their own, and they should be helped. People fall on tough times, and deserve a pick-me-up. But, we won't feel ok as a society unless people learn to be happy with what they have and push themselves to do better and achieve more if they want to buy more things (rather than relying on credit.)

  • West Coast rainmaker's picture

    I agree with everything that has been posted. We have a spending problem; our revenue is only low because unemployment remains elevated.

    I can't believe (actually, I can...) Obama is making a show of a 4% rate increase on 2% of the population. Not only does it fail to address the populist outrage (rich people pay 15% tax!), but it is completely irrelevant to the deficit. For him to portray it as mathematically necessary is just false.

    Honestly, we have to restructure entitlement programs. Does this mean that the government is reneging on the social contract? Yes, but there is unfortunately no other solution. We cannot hope to ever raise enough revenue to satisfy our unfunded liabilities while paying down the debt.

  • In reply to West Coast rainmaker
    TheKing's picture

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