21 January 2013
DEBT: With only hours left, Congress barely avoided the fiscal cliff.
By Kate Doak, Staff Writer
It’s no secret that the American economy is in a trench and that Congress has thus far struggled to find a solution to fix the country’s growing debt. While the country was able to narrowly avoid leaping off the fiscal cliff, a permanent and obviously effective solution has still yet to be developed. With the debt ceiling closing in, Congress really needs to push harder.
The fiscal cliff is a term used to describe the challenge the government had to solve at the end of 2012. At midnight on 31 December 2012, tax cuts for businesses and temporary tax cuts were to end (resulting in a two percent tax increase for workers), a rollback of the Bush tax cuts would occur and taxes for President Barack Obama’s health care law would begin. The spending cuts that were agreed upon as part of the 2011 debt ceiling resolution were also to go into effect, resulting in major cuts for approximately 1,000 government programs.
However, in the last crucial hours, the Senate finally agreed on a resolution. The main elements of the deal are as follows: an increase of two percentage points to the income tax for earners of up to $113,700 and a reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000. Investment income also took a hit with the rise from 15 percent to 23.8 percent and a 3.8 percent surtax for incomes of at least $200,000 or combined incomes of $250,000. This gives taxpayers more certainty regarding the alternative minimum tax (tax imposed at a flat rate).
Unfortunately, the current solution is not going to solve all of the country’s economic problems. In fact, Congress has yet to make another decision to fix the debt ceiling, the limit that the government sets for its own spending. It is also disappointing that lawmakers delayed until the very last hours to make a decision on the August 2011 debt ceiling, which put an unnecessary strain on the economy. Not only that, but only taxes and revenue were discussed and, yet again, spending cuts and the debt ceiling were put off until a later date. This deal did little to take care of the long-term debt, which currently stands at over $16 trillion.
Here is the worst-case scenario (according to the Congressional Budget Office): the new tax rises combined with spending cuts that are expected to reduce the deficit by around $560 billion will reduce the gross domestic product (GDP) by four percentage points, resulting in another recession and a one-point increase in the unemployment rate. The Wall Street Journal put it like this in May 2012: “According to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that.” Basically, the already teetering economy will face a major shock.
Since the fiscal cliff is over and done with, the only remaining solution lies within the debt ceiling. Republican Senate Minority Leader Mitch McConnell, along with most of the Republican Party, is pushing for major cuts in social programs such as Medicare (health care for the elderly) and Social Security, while President Obama refuses to “negotiate over the debt ceiling, [and argues] that Congress must pay the bills for spending it has already approved” (The Chicago Tribune). While Congress needs to start paying off the debt, spending cuts do need to occur, but from which programs is hard to determine. While social programs make up a large percentage of the government’s spending, programs like Medicare, Medicaid and Social Security are extremely important and cutting them too much will cause a lot of panic. The spending cuts need to be reasonable. The problem will not be completely solved by destroying social welfare programs, but slashing defense and other important expenditures is not a solution in itself, either. The cuts need to come from all areas in proportion to one other in order to avoid the loss of any major program.