The Phony Fiscal Cliff

Cliff ahead! Turn left! Turn right! Dig in your heals! Don't stampede over it like a bunch of cattle!

Here on Highway 1 in Northern California cars going over cliffs is a too common occurrence, right up there with drowning while trying to pick "free" abalone out of the ocean. Most of us have seen cowboy movies where cattle stampede over a cliff. We know cliffs are bad news.

For a couple of months now there has been a new scare tactic with the American economy: the Fiscal Cliff. Whether it is real or not, enough yodeling about it has already been done to cause some business people to restrain their hiring and purchasing. This hurts the economy immediately, lowers tax collections and raises government expenses, and may cost Barack Obama enough swing voters to make him a former President come 2013.

The fiscal cliff is a sham, but it is a sham that serves the purpose of a number of special interest groups. They want to turn the fiscal cliff into a bridge to their own profits, at the expense of everyone else.

The fiscal cliff is supposed to have two real components. One is the end of the Bush (President George W. Bush) tax cuts. This will increase federal income taxes for most citizens who pay those taxes. The biggest tax increases would be for those making over $250,000 per year, because they got the biggest cuts under the Bush tax plan. The theory is that this class of people, justifiably called the Ruling Class, will have less money to spend and invest if their taxes go up. They might hire less new workers, or even fire some current workers, in order to keep up their expensive habits like high-class prostitutes, coke allowances (trust funds) for their children, and designer boots. Or they could keep the workers and cut their luxury spending, thus destroying millions of jobs in China and Italy.

The argument is that increasing taxes on the rich will hurt the economy, and therefore everyone. The problems with that idea are numerous. The Bush Tax Cuts for the Rich did not help the economy, so why should restoring the taxes hurt the economy? In fact, if you have had the bad fortune to be around rich people much, you know most of them have poor judgment with money. If they have less income each year due to taxes, and therefore need to think more carefully about investing and spending, that might actually improve the overall economy.

The secondary argument is that the extra taxes on those making under $250,000 will also hurt the economy.
Strangely, the same pundits (and I use that term with sarcasm) who are bewailing the possible tax increases on January 1, 2013, were screaming about the federal deficit for the past four years. According to their (probably true) economic theories, creating a huge federal debt will eventually sink the American economy. It is better for the economy to have a balanced budget, or even to start paying down the debt.

They argue that this is so important, we should toss government dependents and the poor and even the working class to the wolves, because it will be good for all of us in the long run. So they want to keep the Bush Tax Cuts and cut federal funding of just about everything that helps ordinary people: Social Security, Medicare, Food Stamps, unemployment insurance, and aid to public education.

But those federal spending cuts would also decrease demand, just like when the rich spend less. So they seem to be arguing that when the rich spend money it is good for the economy, even if it increases the national debt, but when the poor spend money, it is bad for the economy. In fact, that is exactly what their argument amounts to. And what we should do about it is drag them out into the streets, kick the shit out of them, redistribute the clothes and jewelry they are wearing, then donate their organs to someone who might put them to better use. But being a polite and perhaps cowardly lot, we will instead work peacefully through the political system to try to tax them at a rate that still leaves them far wealthier than they deserve to be.

The second branch of the Fiscal Cliff Scare is the mandatory budget cuts that were negotiated by Congress just last year. It seemed like a good idea at the time. Again, the greater danger that was sold to us, mostly by Tea Party zealots, was a larger federal deficit. I don't have an argument with that: the deficit really has gotten out of hand since Bill Clinton was in the White House. The question was not whether to slightly cut the federal budget, but where to cut. The negotiated cuts supposedly affect the military budget and the domestic budget about equally.

You can tell we are being sold a pile of bullshit by the current right-wing zealot demands: they still want to cut the domestic side of the budget. They are willing to let seniors and the unemployed sleep in the street if that would balance the budget.

But not their precious military. Oh no, every penny spent by the Defense Department is needed to defend the nation against Islamic Terror. Some turbaned dudes paddling a rowboat stuffed with Kalashnikovs and lighter fluid might slip by if we had one less nuclear-powered aircraft carrier and burn Washington to the ground, like the British did in the War of 1812.

The key swing group in this tempest in a national-sized tea cup is those Democratic Party members of Congress who, for whatever reason, support the Pentagon's mindset or are afraid they are going to be droned out of existence if they don't march in line to the Pentagon's marching band. [Note to self: these run on sentences are beyond the attention span of the home-schooled. Try to avoid them in the future.]

Allow me to be explicit. I think that letting all the Bush Tax Cuts expire, including those on the $50,000 to $250,000 per year crowd [which includes me in a good year, the last of which was 2008], will be good for the U.S. economy in the long run. I think cutting the Defense Budget is good for the U.S. economy in both the short and long run.

I think the economy would mend a lot quicker if the Republicans in the House of Representatives and Senate would stick to their so-called principles and cut the federal budget where it can be cut, where that won't hurt people, which is mainly in the Defense Budget.

Realistically, the best case scenario is inaction by Congress. The Fiscal Cliff is really green pasture. If Apple Computer and other Republican fat-cat cash hoarders would just pay their workers in the United States more, and hire more workers, the economy would start chugging along nicely. People would be able to pay a bit more in taxes to help reduce the federal deficit. A growing economy would mean more workers paying into unemployment funds, Social Security, Medicare, and income taxes.

If you care about your nation, now is the time to start looking at your choices for Congress this November. Remember, voting is not enough. Say what you think. Speaking up about politics and economics may be impolite, but it is better than the other option. If you have never given money to a politician before, you might want to try it. He (or she) might even take your calls after that.

"Young men and women, educated very carefully to be apolitical, to be technicians who thought they disliked politics, making them putty in the hands of their rulers, just like always." — Kim Stanley Robinson, Red Mars

Goodbye, Social Security, Hello Screw Deal

Under the Screw Deal between President Barack Obama, most of the Republican Party members of Congress, and most of the Democratic Party members of Congress, the Social Security payroll deduction is being cut by 2%. One might wonder why, after two decades of official government moaning about Social Security being endangered by insufficient funding, they would choose to reduce funding. The only logical answer is they intend to dismantle Social Security; this is the first step.

Where is the public outrage? Workers are happy to have a slight reduction in the Social Security tax in 2011, and seniors already on Social Security are not too worried. The crisis is probably still about a decade away. Everyone is too worried about the short term to worry about the long term. Retired workers will starve some time in the future, but they have no political representation to speak of. Certainly the Democratic Party gave up representing workers decades ago.

Everything is going according to plan, if you are rich. The rich shall pay no taxes. And I really mean no taxes, because even though rich people in theory pay a 15% long term capital gains tax, in reality they can delay payment forever. The other taxes rich people pay, the ones that everyone pays like sales tax, are trivial to them.

A lot of government spending is ongoing, but no one wants to pay for it. Current Social Security taxes pay for current Social Security recipients. In turn current payers are supposed to have their retirements subsidized by future payers. But once erosion begins (and it has now officially begun) no one wants to be there when the levee breaks. So younger current workers will join the rich in calling for reducing the SS tax even further. Until the cycle is complete and we are back to 1929.

Social stratification is growing. The traditional conveyor belt from the working class to middle class, the low-cost college education, is drying up faster than roadkill on a desert highway at midday in summer. Talented people will be trapped in the working class, no-talent rich kids will increasingly become the decision makers of this nation. They will decide to tax the workers and repeal the minimum wage laws. If you want work your options will be the Army, homeland security, and mopping the floors of their yachts.

The working class is not just unorganized, it is disorganized. Socialist parties and revolutionary groups have all but disappeared. The Democratic Party and most unions are rotten or at best incompetent. Even the middle class seems paralyzed by free-market rhetoric.

In the next year or two the economy will continue its normal business cycle recovery. It would have even without the new tax cuts. Given the depth of the recent recession, a recovery cycle might even last five to ten years. The cycle will end when the national debt it too big to repay and interest rates on that debt start spiraling out of control. The rich will be so powerful you can count on both the dismantling of any remaining social programs and the imposition of higher taxes on everyone who is not tax-sheltered.

Of course, other scenarios are possible. But they would take effort. The real problem was the New Deal and the Great Society combined with American global economic dominance post World War II to create an imperialist working class. No one complained about getting $30 an hour to make the steel and explosives dropped on rebellious peasants. Remember when the unions organized workers to attack peace protesters during the Vietnam War? Our unions thought they were indispensable, but they were wrong. Surprise, steel can be made anywhere. Factories can be dismantled and put together somewhere else.

Hopefully Barack Obama will put himself out of his misery and not run for President in 2012. I admit that Obama may have proven to be a better President if he did not have the Republican Party to deal with. But the President can veto any bill passed by Congress, and there should be enough Democrats in Congress to sustain a veto. He could have stopped the tax cut extensions for the rich. He could have gotten a much better deal for the American people in return for those cuts, if he had wielded his veto.

Imagine it being, say, March 2011, three months into taxes going back up to pre-Bush levels. Who would be hurting, who would be willing to make a deal? The rich and their wholly owned politicians. This whole "we have to do it in December" bit was another Big Lie.

What did Barack Obama get in return for himself? Two years of cooperation with Republicans in Congress?

Forget the old deal. Welcome to the Screw Deal. Next Act: Return to the Dark Ages.

Barack Obama's Dividend Play

Barack Obama has played just about all his cards right so far in the Presidential Poker game. He sounded Progressive early in the game, thus winning the Democratic activist primary pot. But now it is an all-or-nothing game.

On economic issues Senator Obama wants people to think that the Bush regime hurt them one way or another. Just as Herbert Hoover was blamed for the Great Depression when it would have happened with just the same if Democrat Al Smith had taken office in 1929, George W. Bush and the Republicans are being blamed for all of the nation's economic woes. [The Republicans would do the same, of course]

Strangely (until you analyze the game) Barack Obama has endorsed one Bush economic policy, special low tax rates on dividends paid by stocks. John McCain endorses the Bush policy as well, but because the will be a Democratic majority in Congress, supporting Barack Obama is a better strategy for the ultra-rich whose income comes mostly from dividends.

There are some arguments for a low tax rate on dividends, but then there are arguments for low tax rates in any specific category. The basic argument is that the tax amounts to double taxation because corporations (sometimes) pay taxes on profits, and then dividends are distributed out of profits and taxed when passed out to individuals. But money is constantly taxed in our society as it moves around. The money paid to wage earners has been taxed in various ways before they receive it from employers, and it is taxed again when they spend it (sales tax, real estate tax, etc.). So the double-taxation argument is just sophistry.

The bottom line is that only rich people derive a significant proportion of their income from stock dividends. So a tax cut on dividends is a tax cut for the rich, and an increase mainly hits the rich as well.

When George W. Bush took office dividends were taxed like any other income to individuals, which meant the top rate was about 40%. The Bush Tax Cuts for the Rich reduced the rate to 15%. John McCain wants to retain the 15% rate.

Democrats in Congress say they want to reverse the Bush Tax Cuts for the Rich. So if they had their way, the maximum tax rate on dividends would end up around 40%. If McCain is elected they can put that into effect. They don't need to worry about a McCain veto. All they have to do is let the Bush tax cuts expire.

Barack Obama has proposed raising the rate to only 20%. Democrats in Congress would not want to defy a Democratic President, so they would have to pass a new law lowering the dividend tax rate to 20% (the lefty Dems could vote against it, since there would be plenty of Republican congress people to vote for it). The rich will be better off under Obama than under McCain, if this scenario plays out.

Why would Barack Obama want to give the rich a break? Because actually he is from the same economic school as Ronald Reagan, the Chicago School of free-market economics. Barack taught law, a necessary adjunct to free market economics, at the school for years. He is not progressive on economics, but he had to sound progressive to win the Democratic primaries.

Obama apologists (an annoying lot) will ignore the realities and say Obama wants a 20% tax on dividends, McCain a 15% tax, so vote for the Democrat.