Patterson: May have to fall off ‘The Little Cliff’ to avoid the big one - East Valley Tribune: Columnists

Patterson: May have to fall off ‘The Little Cliff’ to avoid the big one

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East Valley resident Tom Patterson (pattersontomc@cox.net) is a retired physician and former state senator.

Posted: Saturday, December 15, 2012 2:55 pm | Updated: 10:44 am, Sun Dec 16, 2012.

Americans are rightly concerned about going over the fiscal cliff. But they got their eyes on the wrong cliff. The Little Cliff that is in the news is man-made, a mixture of spending cuts and tax hikes intended to be so onerous that Washington politicians would have to “do something” meaningful to reduce the national debt.

But the Big Cliff is the debt itself – now over 16 trillion and counting – and the economic catastrophe that awaits if we can’t decisively change our ways. How we handle the Little Cliff will say a lot about our prospects of turning into Greece.

It doesn’t look too good so far. President Obama’s proposal is centered on raising tax rates on the rich, the signature issue of his campaign. He has repeatedly emphasized that he will veto any proposal that doesn’t include tax rate increases on the wealthy. He’s very clear that he’s not talking about simply raising revenue or even about other ways of getting more funding from the wealthy, such as limiting their deductions.

The explanation for this strange obsession must be psychiatric, because it surely isn’t economic. Income tax rate hikes are widely acknowledged as the most economically damaging way to raise revenue, since they discourage productivity directly. They wouldn’t do much to avoid the Big Cliff either, since rate hikes never boost revenue as much as projected.

Obama might want to ponder the recent experience in Great Britain. In 2010, 16,000 taxpayers reported annual incomes of over 1 million pounds. Then-Prime Minister Gordon Brown, faced with economic problems similar to our own, raised the top rate on these filers to 50 percent. According to Newsmax.com, just 6,000 taxpayers subsequently reported income over 1 million pounds and the treasury actually lost 7 billion pounds ($11 billion) before new Prime Minister Cameron reversed the rate hikes.

Undeterred, the president proposes $1.6 trillion in tax hikes, as well as an actual increase in stimulus spending! Furthermore he’s demanding that all future decisions on debt limit expansions be delegated to … himself. Now there’s a power grab that would make Egyptian President Morsi proud.

Finally, the president proposes some spending “reductions” that couldn’t pass the laugh test. He wants to cut $800 billion in medical spending with no change in eligibility or covered services. He credits another $800 million in savings from not fighting in Afghanistan. (What about Vietnam? Shouldn’t we book some “savings” from not fighting there?)

He even added back $1.2 trillion in spending cuts from last year’s budget deal. He’s obviously not interested in touching entitlements. His goal is the opposite: to gain more revenues to spend on a bigger federal government.

The president’s proposals are unlikely to prevail intact. Even his own party would balk. But he’s working with the wrong order of magnitude for the Big Cliff. Even if you’re willing to accept all his assumptions and projections, the $1.6 trillion in new tax revenue would occur over 10 years. But we’re racking up $1.2 trillion in debt every year. Even with his unduly optimistic projections, we still have over $10 trillion to resolve before we break even for the decade.

Unfortunately, Speaker Boehner and the Republicans seem to have lost the messaging contest (again). They haven’t sufficiently emphasized that restoring GDP growth to pre-Obama levels is the only way to solve our debt dilemma. So their economic growth proposals get mangled by the media into “protecting their wealthy friends.”

Taxing the rich is popular. Reforming entitlements is not. That’s for another time and someone else.

So the Republicans are in a weak position, as Obama well knows. They have limited options at this point unless Obama becomes more amenable, which is unlikely. They can capitulate on Obama’s major points and hope that at least he will be blamed for the disastrous consequences that are certain if he prevails or they can just go over the Little Cliff. They’ll get blamed in the short-term, of course, but at least we’ll make a little progress toward avoiding the Big Cliff. Not a happy decision.

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