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In order to address the budget logman, President Obama has proposed $1.6 trillion in tax increases over 10 years, and not one single spending cut.   Unless of course, you count “cuts” that were already made or already planned, as the President has an unfortunate habit of doing.  Otherwise, there’s pretty much zero in the way of spending cuts.  It’s not a remotely realistic proposal and goes directly against the principles set out by the Simpson-Bowles deficit reduction panel.

The proposal is so extreme, that we might actually be in a better position going off the “fiscal cliff”.  Indeed, that would appear to be the objective: make the alternative so undesirable, that there’s no other choice.

The “fiscal cliff” would be a terrible option, too, but at least it includes about $100 billion in spending cuts that would be desirable; with a large portion of that coming from the completely bloated Defense department. It’s also worth noting that the fiscal cliff consists of less extreme rate hikes than the President’s proposal.

The President’s proposal would increase the top capital gains tax rate from 15% to 30%+. As I’ve pointed out recently, there’s virtually no economical, mathematical, or logical reason to do this. The amount of revenue it raises is on the verge of being a rounding error.

Sure, it sounds appealing to an electorate feed on a mindless diet of “TAXING THE RICH SOLVES ALL PROBLEMS!”, but it doesn’t realistically address the budget gap. Meanwhile, the amount of jobs that could be killed by a sizable reduction in returns on capital is quite significant. So in some ways, the fiscal cliff is less offensive than Obama’s proposal.

The bad part about going over the fiscal cliff? That, in spite of all the rhetoric to the contrary, the 2003 tax cuts mostly benefited the middle class. Indeed, my estimate was that 75% of the taxes in the fiscal cliff will hit lower and middle income earners. Allowing them to expire would create significant hardship for a lot of people.  But is there an alternative?

If the President isn’t serious about reforming Medicare, Medicaid, Social Security, or even cutting Defense spending, what negotiations can there be?  He’s basically asking for a massive series of tax increases, and offering nothing in return.  He’s telling the American public, “please give me more money, but I can give you no evidence that I plan to spend it prudently.”  He’s begging Congress to take the fiscal cliff, because that’s the option he truly prefers.

Also consider the alternative.  Running massive budget deficits results in the creation of new money.  This creates a stealth inflation tax, that negatively impacts the middle class, as well.  In this sense, both Obama’s proposal (which leaves a larger budget deficit) and the fiscal cliff (which will cut the deficit in half) would hit the middle class about equally.

Obama’s completely unserious proposal makes me less optimistic about the resolution of the fiscal cliff.  The President clearly believes that if he makes an extreme proposal, the Republicans will have to meet him “half-way”, so that he gets the proposal he wanted all along.  Alternatively, he actually wants the fiscal cliff and is doing everything possible to ensure that result.

I actually think the best option to avert the fiscal cliff is for the House Republicans to come up with a plan, and begin negotiating with moderate Democrats in the Senate. If they can agree to a compromise plan with moderate Democrats and pass it in both the House and the Senate, the President will be under enormous pressure to sign it. Otherwise, going off the “fiscal cliff”, as dreadful as it would be, still might be less offensive than taking the Administration’s proposal.

If we go over the fiscal cliff, it’s all on the President’s shoulders.