Happy New Year Cliff Survivors.

It is January 1, 2013 and there is still no legislation preventing us from going over the “fiscal cliff”.  However, I am awake this morning and the world did not end.  So, just like the doom predicted on December 21 by the Myan Calendar, it appears the world did not end last night in some apocalyptic disaster but we are still in danger fiscally as a nation.

The Senate and White House did come up with a deal to prevent us from going over the “fiscal cliff” on New Year’s Eve and the Senate passed the legislation by an 89 to 8 vote (1).  Now this legislation goes to the House and if it passes there, it will go to the President’s desk for signature.  However, just because there is a deal does not mean we are out of fiscal trouble as a nation for we must look at what The Senate and White House negotiated in the deal.

The deal features spending cuts of $15 billion and tax increases of $620 billion (2) so it would appear that we would see a reduction of $635 billion in federal deficits.  However, we must understand what Washington means by a tax cut and will the tax rate increases actually result in increased revenues to the government.

The Federal Government uses “baseline budgeting” when determining its budget.  This method of budgeting assumes there will be increases in spending for necessary programs and automatically budgets in these increases.  If in the budgeting negotiations the Congress cuts the increases in spending for these programs, Congress considers it a cut (3).  This is why even though we constantly hear of budget cuts, the dollar amount of government spending continues to increase year after year.  This method of budgeting allows politicians to claim they are cutting spending while actually increasing it.  For this reason, we have to question whether the proposed spending cuts of $15 billion in this deal are actual cuts or just reductions in automatic increases. 

We also need to question whether the proposed increases in tax revenues due to tax increases in the rich will actually occur.  This $620 billion increase in tax revenues assumes that company profits and wages will remain the same and does not dynamically score the economic effect these tax increases will have on the economy. 

The deal proposes tax increases on those making more than $450,000 per year or the so-called rich.  To someone making less than $450,000 it may seem these people are rich but most of these people make this much because they are self-employed business owners.  These people do not just take the $450,000 plus in income and spend it on themselves but invest part of this money in business expansion.  These tax increases will most likely come out of money these business owners have set aside for expansion.  Without this expansion, we will see fewer jobs created. 

Some of these business owners may also cut back on their businesses in an effort to reduce net income below the $450,000 level so they are taxed at a lower rate.  This will result in lower tax revenues to the government and more layoffs.  Those laid off will no longer be earning a paycheck and will only pay taxes on their unemployment, which will mean additional reductions in tax revenues.  I therefore, doubt the predicted increases of $620 billion in tax revenues will actually occur.  For example, the tax increases in California resulted in a 33.5 percent decrease in tax revenues (4).

This deal does not prevent us from going over the fiscal cliff but only postpones the fall.  To avoid going over the cliff we need real cuts in spending and real increases in revenues into the Federal Government. 

We need to stop the practice of baseline budgeting.  Each department of the government needs to start the fiscal year at zero and petition the Congress for the funds they will need to operate for the coming fiscal year.  I also favor the offering of incentives to department heads that are able to increase the efficiency of their departments by reducing their operating budget from the previous year.  This is how the budgeting process occurs in the private sector.

We also need to quit punishing business owners who produce products, services, and create jobs for our economy.  If a business owner is making $450,000, we want him to make more so he can expand his business and create more jobs.  Since we tax the business’ net income, an increase in income for businesses will result in increased revenues even without an increase in the tax rate.  The business expansion will also create jobs taking people off the unemployment rolls.  These individuals will see an increase in their personal incomes and pay additional taxes as well.  Increasing the tax rate, as proposed in this deal, will only disincentify the business owner from expanding his or her businesses. 

We need leaders that will actually decrease spending, and not just reduce increases in spending.  We need leaders that will begin cutting taxes for the job creators of our country.  We can avoid going over the “fiscal cliff” but the currently proposed deal is not the way to do it. 

1. Pollak, Joel B. AFTER MIDNIGHT, IT'S A TAX CUT; SENATE PASSES 'CLIFF' DEAL, 89-8. breitbart.com. [Online] Breitbart, January 1, 2013. [Cited: January 1, 2013.] http://www.breitbart.com/Big-Government/2013/01/01/Senate-Passes-Fiscal-Cliff-Deal-89-8.

2. Boyle, Matthew. FISCAL CLIFF DEAL: $1 IN SPENDING CUTS FOR EVERY $41 IN TAX INCREASES. breitbart.com. [Online] Breitbart, December 31, 2012. [Cited: January 1, 2013.] http://www.breitbart.com/Big-Government/2012/12/31/Fiscal-cliff-deal-41-1-in-tax-increases-to-spending-cuts-ratio.

3. Limbaugh, Rush. Baseline Budgeting Explained. youtube.com. [Online] EIB Network, July 30, 2011. [Cited: January 1, 2013.] http://www.youtube.com/watch?v=QtU0pbRXfAI.

4. Before it's News. California’s tax revenue drops 33.5 percent exposing Sacramento’s delusion. beforeitsnews.com. [Online] Before It's News, August 21, 2012. [Cited: August 21, 2012.] http://beforeitsnews.com/tea-party/2012/08/californias-tax-revenue-drops-33-5-percent-exposing-sacramentos-delusion-2449544.html.