Merry Christmas and Happy Hangover to all!!

An Important ‘Fiscal Cliff’ Chronology

What’s In The Fiscal Cliff?

by Romina Boccia, James Sherk, Katie Tubb;

November 28, 2012

The nation is now firmly on track to go over the fiscal cliff in January 2013 unless Washington takes action. The uncertainty leading up to the fiscal cliff—especially Taxmageddon—is already hurting the economy today and, according to projections by the Congressional Budget Office, could send the country back into recession in 2013.[1]

Individuals, families, businesses, and the military would all be hit hard by the fiscal cliff, but Congress and the President have yet to act to avoid this economic and defense disaster. Here are specific recommendations for how to avoid the four main parts of the fiscal cliff.

1. Taxmageddon

Seven different categories of tax policy expire on January 1, causing a $494 billion tax increase in just one year. This is uncharted territory: Never has there been such a steep tax increase in a single year.

Most of this massive tax increase stems from the expiration of the 2001 and 2003 tax cuts implemented under President George W. Bush. There is also the payroll tax cut, the alternative minimum tax patch, and a host of other policies that expire at year’s end.[2] In addition, five of the 18 tax increases built into Obamacare are scheduled to go into effect. Families will bear the brunt of this tax increase among American households, with an average increase of over $4,100 in taxes.[3]

Uncertainty created by the prospect of Taxmageddon is continuing to hurt the economy today. Businesses are increasingly concerned about a jump in their own tax burdens and, given the economy’s poor outlook into next year, are reluctant to hire or invest. In 2010, President Obama reversed course and extended all expiring tax policies, arguing that the economy was too weak to sustain a major tax hike.[4] This is just as true today as it was then, with this year’s third-quarter GDP growth of 2 percent being lower than fourth-quarter 2010 growth of 2.4 percent.

Recommendation: Free businesses, investors, and families from uncertainty by extending current policy for all Americans permanently or for at least two years. This will provide time and momentum for pro-growth, revenue-neutral tax reform, which is overdue.Also, stop new Obamacare taxes, especially the tax on non-wage income.

2. Sequestration

The Budget Control Act of 2011 (BCA), a product of last summer’s debt-ceiling deal, increased the debt limit by $2.1 trillion in exchange for spending cuts. The BCA first established caps on discretionary spending to accomplish $900 billion[5] in savings over 10 years and then tasked a “super committee” with finding at least $1.2 trillion more in savings. The super committee’s failure to reach agreement triggered sequestration—automatic budget cuts—totaling $1.2 trillion (including interest savings) over nine years. Sequestration cuts begin on January 2, 2013.

The Department of Defense would bear [….]


[….] Only Presidential Leadership Is Needed

by J.D. Foster, Ph.D., Alison Acosta Fraser November 30, 2012

Abstract: The United States faces a real fiscal crisis, and the impending fiscal cliff of massive tax hikes and spending cuts in January is only the first act. In early 2013, the federal government will exhaust its ability to issue debt legally. Yet as large and as major a concern as federal budget deficits are today, they are of secondary consequence compared with the fiscal quagmire of unaffordable entitlement spending in the next decade. Fortunately, the entitlement problem can be resolved by six simple reforms to improve the fiscal future for Social Security and Medicare. But to implement these reforms, President Barack Obama must lead.

A high-stakes fiscal policy debate of unique size and import has just begun. Absent congressional action to the contrary, a massive slate of tax hikes and spending cuts will take effect on January 1, and that is only the first act. The second act will occur early in 2013 when the federal government will exhaust its ability to issue debt legally. Both acts need prompt solutions.

Speaker of the House John Boehner (R–OH) made the first move. After congratulating President Barack Obama upon his reelection, Boehner promised a willingness to work with him, giving Obama the additional revenues he desired through pro-growth tax reform accompanied by reforms in entitlement programs.[1] President Obama’s counter, while unsurprising, was unhelpful because he focused exclusively on fiscally meaningless and economically harmful tax hikes on upper-income taxpayers. The President repeatedly has argued for a balanced approach, but he has yet to offer a single meaningful proposal on spending reductions.

While the President prepares to start his second term, he should set about negotiating in good faith with Republicans, especially in the House where Republicans were returned to office in the majority with expectations of cutting spending without increasing taxes. The voters, we are told, expect it. This means the President cannot sit back and just harp on revenues. He needs to address spending and in particular entitlements.

Fortunately, the President has occasion and opportunity to [….]


National Defense:  Independent Quadrennial Defense Review Panel Needed

by Michaela Bendikova,

November 30, 2012

In 2013, senior officials at the Pentagon will broadly examine U.S. national defense strategy, force posture, and weapons modernization in a congressionally mandated process called the Quadrennial Defense Review (QDR). The QDR establishes a defense planning program that will direct the Department of Defense’s budget and determine how many vehicles, tanks, ships, aircraft, and other essential equipment the services will procure in the next two decades.

It is essential that Congress establish an independent QDR review panel that would allow a transparent discussion about the size and scope of future U.S. military forces.

Challenges Like No Other

The QDR became law in 1996, and the Pentagon has conducted QDRs in 1997, 2001, 2006, and 2010. Unless Congress changes the law, the fifth QDR will face a uniquely constrained fiscal environment.

The Budget Control Act of 2011 (BCA) establishes budget caps that will result in a reduction of about $407 billion over the nine-year period covering fiscal year 2013 through FY 2021. Even worse for defense, under the sequestration process set to occur on January 2, 2013, defense accounts would be cut by another $492 billion in the same time period.

These cuts come on the top of those that the Obama Administration has announced since 2009, including cancellation of weapons programs with a total lifetime value of more than $300 billion and reductions in the defense budget of about $200 billion between FY 2012 and FY 2016.[1] The President has also made it clear that he will veto any bill that would eliminate or alter the sequestration process unless it includes major tax hikes.

This means that the QDR process will inevitably be driven by budget considerations rather than by a sound analysis of what America needs to secure its interests worldwide in the next two decades. Just as with previous QDRs, it is likely that the next one will fail to address the increasing gap between U.S. commitments and U.S. capabilities.

The President’s latest strategic guidance[2] and the subsequent FY 2013 budget request make defense the lowest priority among the major responsibilities of the federal government. They propose funding levels that would make the President’s own strategic guidance impossible to execute and render the U.S. incapable [….]


Fiscal Cliff Debate:  Entitlements Must Be Included

by Alison Acosta Fraser,

December 4, 2012

Besides revelry, this New Year will ring in $500 billion in tax hikes and $110 billion in spending cuts unless Congress and the president can come together to steer clear of the “fiscal cliff” beforehand.

All the Washington handwringing is ironic, considering that Congress itself created this mess. How? By creating the sequester’s ill-conceived spending cuts in the Budget Control Act of 2011 and teeing up expiration of many different tax policies (some in place for more than a decade) in legislation passed two years ago.

President Obama has repeatedly insisted on raising tax rates for high-income earners. This is an anathema to Republicans so the fiscal cliff looms. Obama called this a “balanced approach” to solving our fiscal challenges. But is it necessary?

Hardly. Tax revenues are quite low, but official budget forecasters from both the Congress and the White House show revenues returning to historical levels as the economy improves.

Spending is high today at just over 23 percent of the economy, versus the historical average of roughly 20 percent. But rather than returning to historical levels, spending will remain high over the next decade and then spiral ever upwards reaching nearly 38 percent of the economy within a generation.

This massive spending increase is driven by three entitlement programs—Social Security, Medicare and Medicaid. Costs will balloon as retiring baby boomers file into these programs. In just 13 years, when today’s kindergarteners enter college, these programs plus interest on the debt will devour all tax revenues.

Entitlement reform is necessary, urgent, and inevitable.

Yet the fiscal cliff discussion has focused only on increasing taxes. What’s missing – if we are serious about fixing our budget mess – are substantive steps to rein in entitlement programs.

Thursday’s White House proposal has details on tax increases, but was shockingly devoid of details on spending. First, the president would increase taxes by nearly $1.6 trillion. Besides millions of families having less to go around on payday, this would also hit the engine of American job creation—small businesses.

It’s hard to understand why this makes sense when the economy is still lumbering along and unemployment high. The president also wants a new [….]


The Fiscal Cliff And The Perils Of Grand Budget Deals

by Patrick Louis Knudsen,

December 1, 2012

One of the major complications in the current fiscal cliff debate is that both sides are overreaching, trying to tie a near-term resolution to a sweeping deficit reduction plan that would address the longer-term budgetary crisis looming in the years ahead. They see the cliff negotiations as a stage for a “grand bargain” on the budget between the President and Congress.

The tight time frame of the cliff’s approach makes such an aim increasingly impractical. Furthermore, history shows that broad bipartisan compromises between the White House and Congress have typically just yielded higher taxes, while the promised spending restraint (except in national defense) and deficit reduction have failed to materialize. Given the current state of divided government, these risks prevail today. More broadly, they also offer a warning to budget process reformers who seek to institutionalize regular budget negotiations between Capitol Hill and the President.

Experience of the Reagan Administration

After his inauguration in January 1981, President Ronald Reagan moved assertively to enact his budget plan, cutting taxes, boosting defense spending, and seeking to gain control of entitlements. With the economy still reeling from the prior years’ stagflation, however, deficits widened initially, leading Congress to push for a series of budget “summits,” as they were called then, to close the gap.

First came the 1982 Tax Equity and Fiscal Responsibility Act, “a $98 billion tax increase which supporters claimed would reduce the deficit from $128 billion in 1982 to $104 billion in 1983.” It did not. “Spending restraints never materialized…and the actual deficit jumped to $208 billion.”[1] (In today’s dollars, that tax hike would have totaled $204 billion and the deficit $432 billion—roughly a third of this year’s red ink.)

In 1984, the President agreed to yet another tax hike totaling $49 billion, which was supposed to reduce the deficit from $185 billion to $181 billion. Once again, however, the deficit increased—to $212 billion.[2]

The 1987 budget summit repeated the pattern. President Reagan swallowed a tax hike of $28 billion, but the result was the same: “The deficit, which was supposed to remain at $150 billion, jumped to $155 billion in 1988.”[3]

The 1990 Budget Agreement

Despite these failures, 1990 produced another major exercise in budget summitry. With deficits having [….]


Saving The American Dream:  Fiscal Cliff And Beyond

by Alison Acosta Fraser , William W. Beach, Stuart  M. Butler, Ph.D., December 11, 2012

Abstract: Unless Congress and the President act promptly and wisely, sequestration under the Budget Control Act (BCA) will undermine military readiness, and the nearly $500 billion tax increase starting on January 1, 2013, will greatly harm an already weak economy. However, this fiscal cliff can be avoided. The key to avoiding this and future fiscal calamities is reform of the mandatory spending programs, from welfare to Social Security, that currently drive federal deficits. The Heritage Foundation’s Saving the American Dream plan would rein in spending immediately, restructure the major entitlement programs to bring entitlement spending under control over the long term, and strengthen the core foundations of these programs.

Since the Heritage Foundation’s Saving the American Dream plan[1] was first published in April 2011, there has been almost no substantive progress on spending control. The only plausible exception was the flawed Budget Control Act (BCA), a product of a contentious debt limit debate. The complete failure of the resultant bipartisan “supercommittee” to reach agreement was a sad reflection on a Congress that is divided and unwilling to pass the legislation necessary to rein in spending.

As a result, the nation is facing the looming sequester, which will further undermine the defense budget, jeopardizing one of the federal government’s core constitutional responsibilities. Yet it would leave entitlement programs virtually untouched, even though they are the largest driver of spending today and in the future. Meanwhile, the prospect of a huge tax increase in January has had a deleterious effect on the economy for many months, although the effect is only a small portion of the harm the economy will incur if the tax increase ultimately takes effect. America seriously needs a true way forward. [….]


A Fiscal Cliff Primer

by Jim Talent,

December 13, 2012

It’s time for a status report on the state of negotiations over the fiscal cliff. Here are some frequently asked questions and answers.

1) Q. What is the fiscal cliff?

A. Under existing law, $494 billion in tax increases are scheduled to go into effect on January 1, 2013. There are three main categories of tax increase that are coming. About a third of the increase will come from ending the Bush tax cuts. Those included across-the-board income-tax cuts, reductions in capital-gains and dividend taxes, a reduction in the marriage penalty, and an increase in the child tax credit. About a quarter of the tax increase will come from ending the payroll-tax cut established as a temporary measure several years ago. About a fifth of the increase will come from ending a “patch” that minimized the effect of the Alternative Minimum Tax on the middle class. There are a number of other smaller tax hikes scheduled to go into effect, including a big increase in the estate tax that will produce only $13 billion in revenue but will destroy a lot of family farms and small businesses.

The cost of getting married, and of dying, is about to go up. For a full discussion, see this report.

2) Q. How big would this tax increase be? A. It would be a $500 billion increase in one year. That’s almost as big as the tax increases imposed by Obamacare over a ten-year period.

3) Q. What’s the official position of the Republicans on the scheduled tax increase?

A. They want to avoid raising taxes on anyone.

4) Q. What’s their real position?

A. See the answer to question 3 above.

5) Q. What’s the official position of the Democrats?

A. They want to continue the tax cuts on middle-income taxpayers and to raise tax rates on higher-income taxpayers.

6) Q. What’s their real position?

A. They want as much tax revenue as they can get. They also believe that next year they can reinstate any of the tax provisions they decide they like. So they believe that, by allowing the country to go over the cliff, they will collect a huge amount of new revenue that will relieve the pressure on them to cut spending, while still being able to reenact later a few of the smaller tax benefits that actually appeal to them.

7) Q. Aren’t the Democrats afraid of the political backlash [….]


Fiscal Cliff:  Decoupling Conservatives From Their Core Principles

by J.D. Foster, Ph.D.,

December 14, 2012

There are many ways to surrender—and some congressional Republicans seem bent on exploring them all.

In the debate over the fiscal cliff, the President’s position is simple: The Republicans must capitulate on income tax rate hikes, and all other serious issues are not up for discussion.

Never mind that Obama already raises taxes on upper-income taxpayers through the 3.8 percent Medicare surtax imposed under Obamacare. Never mind that the tax hikes will weaken an economy stumbling so badly that the Federal Reserve announced it would double its efforts to keep the economy from recession. Never mind that Obama’s approach likely puts the kibosh on any hopes for individual or corporate income tax reform. Never mind that the revenues from the tax hikes are a small drop in a very big bucket compared to projected budget deficits.

In his view, President Obama ran for re-election on, and now has a mandate for, raising income tax rates. In fact, his mandate is solely to continue to press his case. Ours is not a parliamentary system, and Obama is not the prime minister. And so he faces the pesky reality that House Republicans ran opposing higher tax rates and that they, too, were returned to Washington in the majority to press their case. Their mandate is no greater, but certainly no less, than Obama’s.

House Speaker John Boehner (R–OH) made a terrible mistake in both policy and approach in offering up a plan to resolve the fiscal cliff featuring a huge tax hike coupled with woefully inadequate spending cuts and entitlement reforms. Obama’s response? Nothing. The silver lining is that at least Boehner made clear, then and since, that raising tax rates is off the table.

Now, however, worrisome rumors of two different “decoupling” plans are swirling through the halls of Congress. Both plans constitute a clear path toward surrender on conservative principles.

The gist of the first “wash thy hands” plan is simple enough. Some tax hikes threatening on January 1 fall on upper-income taxpayers and small businesses, but the vast bulk of the tax hikes fall on everyone else. So the House would bring up two distinct bills for votes. The first bill would prevent the tax hike for upper-income individuals and small businesses, papered over with certain whimperings as to how the issue could be considered again as tax reform; the second would prevent a tax hike for everyone else.

Presuming both bills passed the House, the Senate would then take them up. As the second bill—the second, everyone-else bill—is essentially what the Senate has already passed, its repeat passage is assured.

Not coincidentally, the Senate has already voted [….]


Sequester Decision Time: Global Leader Or Regional Hegemon?

by Marion Smith,

December 20, 2012

Abstract: The most important goal of the American military is to defend the people of the United States and their interests. The U.S. must remain committed to providing for the common defense, protecting the freedom of American commerce, and seeking peaceful relations with other nations. To do this, America must renew its material investments in armaments and strategic force structure. If America’s defense capabilities continue to decline, the U.S. will have less diplomatic influence and face increased security risks to its interests and territory. The history of U.S. defense spending indicates that America is now at an unmistakable decision point. Imprudent defense cuts today will largely determine America’s reduced role in 21st-century world affairs.

As the year ends, Congress confronts a much delayed, monumentally important decision that will shape the possibilities of America’s role in the world for generations to come. If the $500 billion sequester defense cuts take effect as currently provided by law, the United States will be on track to pre–World War II defense spending levels—a time when America was not a superpower and not the leader of the free world. Beyond that stark reality, the sequester indiscriminately cuts defense programs without allowing for strategically guided readjustments and therefore would harm America’s military readiness even more. [….]

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Til Nex’Time….