News Column

'Fiscal Cliff' Puts Business World on Alert

Oct. 8, 2012

Ike Wilson, The Frederick News-Post, Md.

unhappy man with laptop

The airwaves have been saturated with the phrase "fiscal cliff."

But what is it, and how would it affect families and businesses across the nation?

According to The Associated Press, the fiscal cliff is the expiration of a large roster of tax cuts due to become effective Dec. 31.

If Washington doesn't act, the looming tax increases, combined with $109 billion in automatic spending cuts scheduled to take effect in January, could throw the fragile economy back into recession, economists warn.

If the tax cuts enacted under President Barack Obama and his predecessor, George W. Bush, expire, a middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year.

"We are a country in real trouble," Frederick businessman Donald Linton said. "I don't know if it makes any difference which person becomes president in November.

"We have dug a deep hole, and if we don't do something soon the interest on the federal debt will be more than all of the income taxes we collect," said Linton, a principal of Linton Shafer Warfield & Garrett Professional Accountants in Frederick.

Taxpayers across the income spectrum would be hit with large tax increases, the AP reports, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making $110,000 to $140,000 could see a tax increase in the $6,000 range.

Making matters worse, Linton said, Social Security and Medicare are also in financial trouble, and the new health care plan will be a financial drain.

"I believe that the fiscal cliff was brought on by politicians 'playing chicken' with fiscal policy," said Anita Jose, chairwoman of the Hood College economics and management department.

The toxic hyper-partisanship between the Republican and Democratic parties resulted in this sad state of affairs, Jose said.

"Instead of finding sensible long-term solutions to budget deficits and debt reduction, the Congress and president used short-term, Band-Aid measures to temporarily fix the ailing economy and stimulate economic growth," Jose said.

"To use another idiom involving chickens, now the chickens are coming home to roost."

Both short- and long-term measures are needed to address the fiscal cliff and its underlying causes, Jose said.

"In the short run, we should extend the Bush-era tax cuts to people making under $400,000, agree on very modest spending cuts and extend unemployment benefits," Jose said.

In the long run, the U.S. needs a balanced policy with a mix of spending cuts and tax revenue increases, she said.

"Comprehensive reforms in entitlement spending, defense spending and tax policies are key to finding a long-term solution to deficit and debt reduction."

The fiscal cliff is being discussed in local college classrooms.

"Just this week my students have been looking into the fiscal policy problems we will be facing on Dec. 31st," Frederick Community College economics professor Paula F. Lindsay said.

Fiscal policy is the deliberate exercise of the federal government to manipulate spending and taxes to correct either recession or inflation, Lindsay said.

"Despite the long-term burden of debt created by annual deficits, now is not a good time to cut government spending."

Economic recovery is very weak, and the nation's economic growth rate for 2012 is projected to be only 1.7 to 2.0 percent, she said.

If Congress does nothing, the Congressional Budget Office estimates that there will be a reduction in the budget deficit of 5.1 percent of gross domestic product, Lindsay said, meaning a growth rate of only .5 percent, which represents a substantial cost in the short run.

"Alternatively, Congress could reduce the short-run pain by eliminating the fiscal policy restraints without imposing fiscal restraints in subsequent years," Lindsay said. "This would mean considerably more costs in the long run. There are options that fall between these two extremes."

Linton said the government should not raise taxes in the middle of a recession, but should increase spending on capital items to pump up the economy.

"I don't have an answer as to what do we do," Linton said, "but I know time is running short and Congress and the president need to spend more time dealing with it than running for re-election.

"Maybe one day we will get limited terms for Congress so they will run the nation more like a business."



Source: (c)2012 The Frederick News-Post (Frederick, Md.) Distributed by MCT Information Services