Rathbun: Much ado about nothingWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
I am getting very tired of hearing about the severity of the tax increases and spending cuts that are supposed to take effect, but ultimately won’t, on Jan. 1.
Let’s take a quick look at the term fiscal cliff. Once a person or an object goes over a cliff, it is pretty much an irreversible action. No matter how God-like Congress thinks it is, it cannot reverse time or repeal the law of gravity. So going off a cliff is not a proper analogy. Maybe pothole would be more appropriate, especially in Toledo.
Let’s go with fiscal pothole, since it is less fatal but still something one wants to avoid if possible. Now that we have the proper analogy, let’s look at the numbers that are being thrown around and see if they add up. The fiscal pothole consists of $100 billion in mandatory spending cuts and $400 billion in increased taxes.
The $100 billion in spending cuts is not a cut but merely a decrease in the rate of increase of government spending. Four years ago when President Barack Obama took office the highest annual deficit to date was $500 million under President Bush. Since then we have run annual deficits of more than $1 trillion for four years in a row. Will reducing that by $100 billion or 8 percent of the deficit or less than 4 percent of the annual budget, send us over an irreversible cliff? Doubtful.
Next, the $400 billion in tax increases. While I agree that this is bad for the economy and for growth overall, the negative effect will not be felt on Jan. 1 but it will probably take more than 18 months to fully collect the amount of taxes indicated. That is assuming, of course, that those with high incomes don’t figure out how to avoid being assessed those taxes to begin with.
Every time that a government raises taxes on people they ultimately figure out how to avoid those taxes and consequently the government actually collects less in taxes than it did before the increase. Just ask England.
Furthermore, to illustrate the futility of this discussion of raising taxes on the rich, if President Obama gets his tax increases on the “rich” it will only take 500 years of that increase to pay off the 2011 budget deficit! Five-hundred years to pay off one year of deficit. “It’s about math!”
The bottom line is that this is not about revenue, spending cuts or math; this is about power and ego. All of these politicians are only concerned about their own legacies and re-election prospects. They could not care less about the financial condition of the American people, jobs, the value of our money or America’s place in the world.
The new taxes will affect the stock market in the sense that people will sell holdings before the end of the year and next year, if the law stays in place, dividends and capital gains will be penalized. Every dollar that is taken out of the system in taxes is one more dollar that is not available for capital reinvestment and therefore hurts the overall economy.
Jan. 1 may be an additional fiscal pothole for the taxpayers but we are not going off a cliff because of current tax laws and scheduled spending cuts. One could, however, make the case that we are already over the cliff with a $16.3 trillion anvil tied around our neck. But that’s another topic for another day.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard weekdays on 1370 WSPD at 4:06 p.m. on “After the Bell” and every Wednesday and Thursday at 6 p.m. throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at firstname.lastname@example.org.
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