Although there's less than a month before the looming deadline for both parties in Washington to make a deal that avoids the automatic tax hikes and spending cuts imposed by last year's debt ceiling crisis deal, known as the 'fiscal cliff,' there seems to be little hope. The Democrats' latest position calls for a $1.3 trillion spending increase that includes an additional $50 billion stimulus attempt to offset the impact of their proposed tax increase on earners making over $250K a year. They also want the President to have unilateral authority to raise the debt ceiling without needing Congressional approval. In return, they promise to come to the table later to discuss spending cuts. That the Party of Stupid, AKA the Republicans, or at least some of them, are willing to bargain based upon this offering from the President and his legislative comrades-in-arms is clear evidence that those who fail to learn the lessons of history are doomed to repeat it. George H.W. Bush compromised with the Democrats in the Congress and agreed to raise taxes as part of a deal to bring the deficit under control back in 1991, and not only did the Democrats fail to cut spending as they agreed, they beat Bush over the head with the 'he lied about not raising taxes' meme... to the point of beating him out of the White House. Of course, Bush 41 had only to look back a few years to the Reagan 'deal' with Congressional Democrats, where once again future spending cuts for current tax increases was made by Republicans... and broken by Democrats. If Charles Schultz was a political cartoonist, Lucy would be the Democrats and Charlie Brown would be the Republicans... always falling for the same old trick.
So, where do we go now? Many prominent Democrat-aligned pundits, folks like economist/columnist Paul Krugman, are urging President Obama and the Democrats to hold hands and go off the Fiscal Cliff. The argument is, that by doing so, the Democrats get everything they want; tax hikes that they don't have to own, and spending cuts that hit defense spending more than other discretionary and mandatory spending. Better yet, the Democrats are confident that the media and public opinion will paint the automatic tax hikes and spending cuts as the sole responsibility of the 'unreasonable and extremist' Congressional Republicans... and they are probably correct. Because the GOP doesn't want to be seen as the Party that took us 'over the cliff', they think, Democrats hold all of the cards. Force the Republicans to break, to give in on Democrat positions on taxes and spending, they think, and not only will Democrats get everything of substance they want, but they also get the benefit of shattering the Republican party as an effective counterveiling political force. Even if the Republicans hold out, they will eventually cave and vote to lower taxes on everyone except the so-called '1%'... and then the Democrats will get credit for lowering taxes on most Americans. Or so the thinking goes.
I see it differently. What Democrat politicians and pundits, and many Republican pundits and politicians also, are ignoring is the impending debt ceiling, and how hitting it will force the Democrats' hands. The charade of federal spending without having the revenue stream to support it comes to an end once the government's ability to print money and swap it out for IOUs in the form of T-bills is the enabler of our reckless deficits, and when it can no longer occur the charade is over. This is why the Democrats want to usurp the authority to approve raises in the debt ceiling from Congress and hand it over to President Obama; holding fast on the debt ceiling is the nuclear weapon in terms of budget negotiations for the Republicans and the Democrats want them to unilaterally disarm.
Instead, the Republicans should offer the Democrats a deal they shouldn't refuse: leave the tax rates alone while modifying tax policies as outlined below, and enact a financially-responsible budget as outlined below... or we can all go over the Fiscal Cliff and then no Debt Ceiling raises. That means no more deficit spending after February at the latest... and draconian cuts to spending to match tax revenues. Either way will get us back to fiscal solvency, but the Republican alternative will do it in a more gradual, less painful fashion. The Democrat alternative, as proposed, will only lead us further into debt.
What sort of tax and spending proposals am I suggesting? The tax side is simple: let the super-wealthy (those making more than $5 million/year) pay the same rates on their capital gains as they would if it were ordinary income, exempt the super-wealthy from being able to avoid taxes by donating all or part of their wealth above $5 million to charitable trusts like the Gates Foundation, and eliminate federal tax deductions for secondary residences and state income taxes for everyone. Those changes would mostly affect the very wealthy, and they would raise over $3 trillion in the next decade... more than twice the amount that Obama's income tax rate hike would generate, without impacting the upper middle class family with two wage earners making low six-figure salaries. Reining in spending is equally simple: go back to the FY2007 budget, and increase it by the official government rate of inflation to 2012 levels. And then freeze it for two years before allowing a maximum increase to match the inflation rate, continuing to allow increases indexed to inflation every two years (just before the Congressional elections). As to how the money would be allotted among the different departments of the federal government, that is something that could initially be applied as per the current percentages and then renegotiated later in the year.
Three simple choices: do nothing and let the Democrats deal with the insolvency in a few months, take the proposed Republican plan and ease our way back to solvency in the next few years with minimal economic impact, or keep on down the road the Democrats have led us to until the US implodes within a decade... making the worst-case Fiscal Cliff/Debt Ceiling consequences and the Great Depression pale in comparison. The Republicans, and the country, have a way out of this mess. Do we have the will?