Why Does the “Fiscal Cliff” Seem to Make Everyone Crazy?

In a recent post on this site about the “fiscal cliff,” the author discussed this “old becomes new” economic situation in much the same language used by political commentators and politicians today. And, as such, it evoked a slew of responses from both liberally and conservatively inclined commenters about what the real reasons were behind our current fiscal crisis. We have heard all the talking points about job creators and the poor’s supposed dependency on entitlements. We have also watched everyone from the House to the Senate point fingers at the other side and squeal “they did it!” My question is, when are going to have a real, adult conversation about what this country needs to do to get back on track? Regardless of who is to blame, who can score political points, or who will look the worst once this is all over, when are we all going to set the example for our leaders in Congress by moving past the rhetoric and addressing the problem directly?

For all those screaming on the sidelines at one another, this is not to say that your passion isn’t warranted. But, have you ever heard the phrase “he who argues with a fool…”? Well, who’s to say anyone’s a fool here? One thing that can be said is that the American public is totally over this whole partisan, political football thing and they simply want their Representatives and Senators to figure this whole mess out.

What is the “Fiscal Cliff” and How Did We Get Here in the First Place?

Those on the right will argue about this, but this whole mess started because of the “Bush Tax Cuts.” And, I find that the most thorough, unbiased explanation of these relief measures comes from Investopedia.

A series of temporary income tax relief measures enacted by President George W. Bush in 2001 and 2003. The tax cuts lowered federal income tax rates for everyone, decreased the marriage penalty, lowered capital gains taxes, lowered the tax rate on dividend income, increased the child tax credit from $500 to $1,000 per child, eliminated the phaseout on personal exemptions for higher-income taxpayers and eliminated the phaseout on itemized deductions and eliminated the estate tax.

With this understanding, it is clear that the Bush Tax Cuts lowered tax rates for everyone. The rich and poor alike have gained from these measures. And, the easiest way to understand the cuts is simply to grasp that there were previously higher rates and, after these laddered measures became active over the past ten years, the rates have been lowered across the board.

So, where does this fiscal cliff come in you ask? Well, Congress has been wrestling over these temporary tax measures since President Obama was elected. And in 2010, against the advice of many in his party, Obama signed an extension of the tax measures until December 31st, 2012. And, since Congress couldn’t get their act together to solve this issue, President Obama pushed for spending cuts that would automatically activate if no compromise was made. The Republicans signed up for this, to their dismay, and everyone kicked the tax cut can down the road and moved on to the next issue.

Upon expiration, these tax cuts would be joined by sweeping cuts across other spending, like defense, for example, would face strict cuts. This is where the term “sequestration” comes from. So, here we are, perched atop the fiscal cliff.

What are the Options Right Now?

Really, it is a simple linear equation on this one. You have your outflow variables on one side like defense spending, education, healthcare, and the like. And, on the other side you have your inflow variable: taxes. People will try and muddy up the conversation and throw Social Security in there but, ever noticed how your pay stub deducts that automatically? Well that’s called a payroll deduction. We are talking about income taxes. These are two separate conversations and for now, the twain shall not meet.

So, it is supposed to look something like this:

Incomes Taxes =Defense Spending + Education + Healthcare + Other Stuff

But, with our huge deficit and other income from the few loans we have out there, it really looks like this:

Incomes Taxes + Other income =Defense Spending + Education + Healthcare + Other Stuff +Federal Deficit/Credit Payments

You get the point right? These are the levers that need to be pulled. They are toggles that need to be, I don’t know…toggled. And, everyone has an opinion about which ones should be toggled when and by how much. Liberals say we should raise taxes and cut defense. And Conservatives say the exact opposite. But, being that this is a linear function, isn’t the answer somewhere squarely in the middle? Arguing back and forth about who did what really solves nothing. And, until we start really understanding and thinking through the options before us, we will get nowhere.

It wasn’t long ago that this country had to buckle down and face World War I. Subsequently, the Great Depression, caused by a host of factors, led into the start of World War II. And, during this evolutionary period for our country, we didn’t spend so much time denigrating and vilifying one another for political gain. Folks figured out that things would be harder and they wouldn’t have all the things they wanted but they would work to get what they needed. This isn’t meant to be preachy, but when are we going to start talking about what might happen if we do go over this fiscal cliff? Have we even considered the fact that we, the people – no pun intended – have some control over our own domains? What are we going to do to get serious about our body politic? And, what does this fiscal crisis mean to the Average Joe?

What is the Likely Outcome?

Politicians and pollsters would like you to believe that the world is going to end if the other side gets what they want. But, the truth is, the two sides are a lot closer on this stuff than they’d like to put on. The focus on reelection sometimes gets them all up in a tizzy. But, it is highly likely that the next few weeks of political melodrama will be capped off with an anti-climatic middle of the night vote. And, surprisingly, all will be saved. Even if all is saved for only a few more years, all will, nonetheless, be saved. I mean, that’s what happened last time.

But, in the meantime, this might be a good time to put the pointed finger away and turn some attention to the fact that we have got a looming fiscal crisis threatening to undue the progress made in the past few years. Not only that, this crisis is totally controllable. With some finesse and a lot of compromise, our leaders could get a solution passed tomorrow (this is a tad hyperbolic but you get the point). But, how are they going to get there with all the bickering and political grandstanding? The truth is, within this country, there are two spheres which exist in parallel. In a political sense, the right and left exist in almost perfect disharmony. And, they operate in disjointed bubbles which allow them to only reinforce their own beliefs. But, sometimes, you just need to hear a voice of reason to snap you back into reality.

What would you tell our friends in Congress to do if you could? What lessons have you learned that might be worth passing on to another person stressed out over the looming fall? Maybe we could all think about increasing our savings and starting a money market account before rates get any worse. Or, one might consider cutting back on gas usage to use the saved dollars to pay off school loans or other debt.

There are many lessons to be had here. But, what I would say is, let’s stop debating and start listening. Rep or Dem, conservative or liberal, we have got to get this straightened out. The New Year will be here before we know it. And, we have got to get our political houses in order. What do you think we really need to do about the fiscal cliff? Without blaming anyone or pointing fingers, what are some real solutions to this very very real problem?

Still fired up about the cliff, tell your Representative directly here.

Or, contact your Senator here.

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