There Is No Fiscal Cliff – – Just A Dangerous Game of Russian Roulette

Perhaps that’s a distinction without a difference, but we don’t think so.  The so-called fiscal cliff is nothing more than a contrived crisis that, according to the consummately non-partisan Washington Post Associate Editor, Bob Woodward, was cooked up by Jack Lew, Obama’s former director of OMB (Office of Budget and Management) and who now is the White House Chief of Staff, and White House Legislative Affairs Director Rob Nabors who sold this exercise in mischief to Senate Majority Leader (and mischief-maker-in-chief) Harry Reid.

While the White House and the Democrats have skillfully portrayed the feckless Republicans as the intransigent party responsible for the gridlock and the so-called fiscal cliff to which we are racing, nothing could be further from the truth.  Woodward’s, “The Price of Politics,” the product of 18 months of digging and reporting, establishes the anatomy of our current dilemma and makes it clear the idea for the draconian spending cuts (Sequestration) originated in the White House – and not in Congress.

The fact is that President Obama and House Speaker John Boehner reached an agreement (the so-called grand bargain) to raise over $800 billion in increased revenues.  Boehner was willing to take the heat and fight the absurd Norquist “no-new-taxes” pledge in order to secure those additional revenues.  Obama, apparently realizing he had given away his bumper-sticker campaign centerpiece (“millionaires and billionaires should pay more”), then called Speaker Boehner and upped the ante to $1.2 trillion in additional revenues, and thus, the so-called fiscal cliff was born.  This howling crisis-child can trace its lineage to the White House.

The nation finds itself a hapless, involuntary, participant in a game of Russian roulette, and it is the President and the President alone who is spinning the chamber.

The President pretty much had the Republicans on the ropes when he backed out of his deal with Boehner by raising the stakes from $800 billion to $1.2 trillion.  Then, a funny thing happened on the way to the White House during the election campaign.  Romney floated his proposal to raise revenue by capping deductions.  “It doesn’t add up…do the math; It’s just simple arithmetic” protested Obama (borrowing from Clinton’s convention stem-winder).

The funny thing is, it does add up.  In fact, it adds up rather simply and nicely.  As we reported in last week’s essay, the liberal Tax Policy Center determined that capping all itemized deductions at $50,000 would yield $749 billion in extra revenue over the next decade, approximating what Obama and Boehner had originally agreed to last year.  And, lo and behold, capping deductions at $25,000 would raise $1,286 trillion equaling the new demand to which Obama had upped the ante when he reneged on his original deal with Speaker Boehner.  And setting the cap at $17,000, as Romney had also proposed, would raise a whopping $1.747 trillion in new revenue.  What’s more, the liberal think tank found that the top 20% of taxpayers would pay 96.2% of the tax at the $50,000 cap and the top 1.0% would pay 79.9% of the tax. In fact, as we reported last week, the top one tenth of one percent would pay nearly half of the increased taxes with the cap on deductions set at $50,000.

So now, the White House had a real dilemma on its hands.  Romney’s simple proposal to cap deductions really did negate the need for raising tax rates on anyone, especially in a weak economy.  So what to do?  Never at a loss for championing higher taxes to fund government gluttony, President Obama has simply upped the ante once again, and is now demanding $1.6 trillion of increased revenues as part of any budget bargain. That’s twice the number he and Speaker John Boehner agreed upon in the grand bargain talks in the summer of 2011.

Those talks, according to Woodward, fell apart when Obama telephoned Boehner with his $1.2 trillion demand. Boehner, of course, refused, as Obama knew he would and the infamous Sequestration, first suggested by Obama’s budget director, became part of the deal.  Obama and his key aids knew perfectly well that Sequestration, which mandated what Secretary of Defense Panetta called devastating cuts to defense on top of the $500 billion already scheduled, would put tremendous pressure on the Republicans to yield.  So Obama is really telling the nation it has a choice between a recession-causing growth slowdown due to higher tax rates that would go into effect in January, and a much sharper slowdown, as much as 5 percent according to many economists, if we go over the fiscal cliff.

Given that the default position of most in the media is to blame Republicans when Republicans and Democrats are not able to reach agreement, Boehner could have a revolt on his hands if he hangs tough in the budget negotiations.  According to Politico a number of House Republicans, including some staunch conservatives, think they’ll have to give in on higher rates.

But Politico also observes that there is a very stark reality working against Obama: the gravity of the government’s fiscal condition. The president knows perfectly well that current entitlement programs are built on promises the government cannot keep. Here’s why:  Federal spending under Obama has been running 24 percent to 25 percent of gross domestic product. During World War II, revenues never reached this level. Since the war, the highest level reached was 20.6 percent of GDP which was in 2000, when capital gains tax revenue soared from Silicon Valley.

Obama is, to say the least, very self-assured.  He even believes, to use his words, that “a majority of Americans agree with (his) approach to ask the wealthiest Americans to pay a little more in taxes.”

Well, not exactly.  Sixty-three percent of voters, according to the very exit polls the president likes to cite, responded “no” when asked if they favored tax increases on anyone.  It’s only when asked, “who should have their taxes increased if taxes are to be increased” that respondents voice a strong preference for taxes on the wealthy.

Raising taxes on anyone is a bad idea when the nation needs economic growth more than anything else.  This is especially true when there is an alternative that raises just as much revenue simply by capping tax preferences that often merely distort the marketplace.

So there you have it.  The country and the markets are being traumatized by a looming fiscal crisis that was concocted as a negotiating strategy by the Obama Administration.  The proposal to raise additional revenue by simply capping deductions (overwhelmingly on the wealthy) as recommended by Simpson-Bowles, proposed by candidate Romney and analyzed by the Tax Policy Center is far superior and far more efficient than the campaign-driven, bumper-sticker-tested Obama plan to raise tax rates on the wealthy.  Any increase in tax rates that produces a decrease in economic growth is, of course, an indirect tax on most everyone.  It may have been good for the campaign, but it will prove to be bad for the country.