As students, we have a lot on our minds with the end of the year getting closer. Studying for final exams, what gifts to buy for whom, where to spend our holiday — these are examples of what we concern ourselves with in the coming weeks.
But this list excludes one important concern that we should all be mindful of this year in particular: the fiscal cliff.
At the end of 2012, the tax cuts imposed by the Bush administration will expire. This means rates on income, capital gains, estate and many other facets of general taxable income will increase.
There is also a separate issue of automatic spending cuts, or sequestration, which will greatly reduce funding for various arms of the government. $55 billion will be cut from defense spending, and an equal $55 billion will be cut from non-defense spending. This reduction of approximately $110 billion in subsidy will occur every year for the nine year life of the sequestration.
These two events make up what is widely referred to as the fiscal cliff. Of the two issues, the latter brings the greatest concern, while the former will be the most difficult to fix.
If the sequester is to run its course, immediate economic slowdown will occur in the primary form of job loss, bringing the chance of another recession into the realm of probability. But the reason this sequester was even passed by Congress was to motivate both democrats and republicans to work together to reduce the current deficit.
This spending cut program was purposely made as ugly as possible so both parties would have no choice but to compromise when the time came. And now, the time is here. There is little chance of the sequestration actually coming to fruition, but the possibility of this catastrophic cut is still enough to cause worry.
Taxes are less straightforward and are instead shrouded by a thick veil of disagreement and argumentation.
It is a general economic theory that when an economy is in or working out of a recession, raising taxes will exacerbate the problem. Limiting the amount individuals are able to spend, more than a recession does by itself, will further decrease GDP growth.
However, regardless of political affiliation, President Obama had been very clear about his plans for taxes throughout his campaign for re-election. His platform included raising the tax level for high-income citizens making an annual amount of $250,000 and above. Now that he has been reelected, he has the general public on his side. Therefore, his administration has the leverage needed to get tax increase legislation passed.
The difficulty stems from the partisan rift that has developed in Washington. Both sides of the aisle have been stubborn in their opinions on the direction of tax rates. The political aspect behind the issue has gotten so twisted that voting for the Obama tax increase would be considered a tenure death sentence for many republicans planning to run for reelection.
The instant their opponent publicizes that they did so, the conservative voters will feel betrayed, and the incumbent will most likely be ousted. This is just one example of the many factors contributing to the impasse in Washington.
It’s unfortunate, but that is the state of the current political environment. Compromise has shifted from the fundamental basis for democracy, to a necessary evil, to just evil.
I feel, as Warren Buffet expressed in his New York Times article “A Minimum Tax for the Wealthy,” that there should definitely be a tax increase in the upper echelon of income, but also raising the criteria to $350,000-$500,000 and above.
This would increase tax revenue which would, although modestly, help the deficit. It would also protect the salaries of the low, middle and moderately high income citizens, promoting spending and GDP growth.
Of course, this is a simplified version of what actually must be done to fix our economic problems, but these are the kinds of conciliations our political leaders must be open to.
The future will call for both fiscal and monetary reform to fix our disjointed economy. There is no perfect plan that everyone will agree with, and it isn’t likely there will be. So for now, it will have to be compromise that bridges this fiscal cliff.