SPN MacIver Institute 2012 National Think Tank of the Year
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Cliff Diving

Comments | Posted in mi perspectives | By Sean Lansing | Posted December 31, 2012 9:51 AM

By James Wigderson
Special Guest Perspective for the MacIver Institute

We're told the first English visitors to Hawaii were astounded to see the island native chiefs diving from cliffs into the water below. This ancient sport was for the chiefs to demonstrate their boldness to their subjects. The chiefs would enter the water feet first with the object of making as little of a splash as possible.

President Barack Obama is the latest Hawaiian to practice the ancient sport as he and Congress are ready to take the country over the fiscal cliff. Unfortunately, the splash in the economic waters will not be small at all. If an agreement is not reached soon, we might witness a very painful economic belly flop.

The latest reports are that the two sides are not that far apart. According to the Washington Post, Democrats have agreed to a separate vote on raising the inheritance tax (the death tax), and the Post reports this means the amount when the tax kicks in will remain at the current level of $5 million instead of $1 million.

Democrats also have raised their definition of the "rich" to $450,000 per year instead of $250,000. Republicans have reportedly given in on having the CPI increase adjusted for Social Security, a baby step to controlling the costs of entitlement programs.

On the other hand, there are still differences about deferring automatic cuts in spending, with Democrats offering no offsetting cuts to replace the cuts from the sequestration in the fiscal cliff.

Meanwhile, according to Luke Russert at NBC, Wisconsin Congressman Jim Sensenbrenner has announced he'll be really unhappy if the House of Representatives has to meet Wednesday because he has Rose Bowl tickets. Of course, if there is no vote soon, we're all going to have to worry about a lot more than if Barry Alvarez was worth every extra penny the University of Wisconsin paid just so Sensenbrenner could watch him coach one more game.

For starters, the Alternative Minimum Tax will hit nearly 30 million more Americans on income earned in 2012. In addition, the 2% payroll tax reduction will also expire, reducing take home pay for working Americans. That first bounce down the cliff side always hurts the most.

And don't forget, the Bush-era tax cuts will expire, raising taxes on Americans at nearly all income levels, not just the "rich" that Obama promised to tax during the campaign. Taxes on capital gains will also jump from 15% to 20%.

For Democrats, they should be concerned about the required cuts in federal spending that could result in the near-immediate layoff of 15% of federal employees, according to Stephen Fuller, a professor at George Mason University, in an interview on National Public Radio.

(By comparison, Wisconsin Governor Scott Walker brought state spending under control without raising taxes. As a result, the state did not have to lay off employees despite the deficit spending under Walker's predecessor.)

But wait, there's more. The Earned Income Tax Credit will be reduced if everyone goes over the cliff with Congress and the White House, directly affecting low-income earners.

In a blow for truth in accounting, if Congress and Obama do not agree to a plan to avoid the fiscal cliff, the "doctor's fix" to Medicare will expire. The "fix" is separate legislation to better reimburse doctors for care under Medicare. Because the "fix" is a separate piece of legislation, it masks the cost of federal health care expenditures, including for ObamaCare.

If this "fix" is not renewed, reimbursements to doctors will be cut by 26.5 percent. That means fewer doctors will accept patients who are using Medicare.

Obama and the Democrats want to extend unemployment benefits to over 2 million Americans. Republicans want to minimize the amount taxes will be raised and they want to cut spending. The resulting deal may look less like cliff diving and more like Rodney Dangerfield doing the Triple Lindy at the end of Back to School, complete with multiple diving boards.

Meanwhile, Obama played amateur stock analyst on Meet the Press Sunday when he said that going over the fiscal cliff will hurt the markets. So far the markets have been reacting badly to stumbles in the negotiations.

But there is another kind of market pressure that is also driving the debate in Washington. In 2012, Standard and Poor lowered the credit rating of the United States because of the nation's rapidly increasing debt levels. Even if Congress and Obama can work out a deal that pushes off the fiscal cliff for another year, the $16.4 trillion debt ceiling will be reached in late February or early March. How long will Congress be able to stall addressing the larger debt issue before that cliff becomes impossible to jump?