Ryan Alexander is the president of Taxpayers for Common Sense.
Unbelievably, as I write this on the morning of December 31, there is no clear deal in place to avert any of the automatic tax increases or across-the-board spending cuts that make up the fiscal cliff. The president and the Congress seem to have moved a little closer together, but with only hours left on the clock, and even if the supposed deal being discussed is agreed upon, it is more likely at least some of us will go over some part of the cliff. What does this mean and for whom?
First, let's talk about the tax increases. Back when the 2001 and 2003 tax cuts were enacted, they were set to expire in 10 years because Congress couldn't find a way to pay for them. The most ardent believers in the structure of these cuts believed the economic growth unleashed by them would increase federal revenues so much that we would all but eliminate the federal debt, others believed the drop in revenues, and resulting increase in deficits, would encourage significant reductions in federal spending.
The 2001 tax cuts were enacted before 9/11, before the massive increase of government security spending (notably, government spending that even many conservatives love), and before we launched two wars. While we saw significant economic growth in the decade that followed, we also saw the financial crisis and the worst recession since the Great Depression.
Now, let's look at the automatic spending cuts, otherwise known as sequestration. The last time Congress created a crisis for itself, the impasse over raising the debt limit in 2011, it passed the Budget Control Act as a means to scare itself into action. Sequestration was intended to be the threat that was so horrible, Congress would finally take specific action to curb spending. Apparently it wasn't enough.
So what's the fallout if nothing happens today in Washington?
It may take a few weeks, but by the end of January, most Americans will see the effect of the tax increases in our paychecks (many payroll services will have already calculated the first paycheck of the year based on last year's rates). But when that second paycheck arrives, not only will higher tax rates go into effect, but the payroll tax holiday enacted in 2010 will expire. For those of us already struggling, even a few dollars will make already hard choices more difficult. For others of us, this one-two punch may mean less saving or less spending.
Today will be a volatile day in the financial markets, with investors concerned about the uncertainty of policies ahead selling off stocks in the last day of certain policy. In the coming weeks, markets may continue to be volatile—economists on both sides of the political spectrum agree that the self-inflicted economic wounds caused by the inability of Congress to act will undermine market confidence. And of course, the inaction of Congress also leaves us with our unresolved debt problem and another fight four to eight weeks from now over whether to raise the debt ceiling. We all know how well markets responded to the last manufactured political crisis over the debt ceiling.
The across-the-board spending cuts, known as automatic sequester, are going to inflict some pain. Local governments and contractors alike will continue to hold back on hiring and spending, as the dollars cut by sequestration are withdrawn from the economy. And even efficient or publicly supported spending, think FEMA disaster aid, will face automatic reductions. But on the defense side in particular, the pain should remind us that effective and expensive are not synonymous—there are plenty of opportunities to reduce pentagon spending without compromising our security. Congress can make smarter cuts in the coming weeks, but the failure to make a deal so far certainly doesn't provide the confidence most agencies or businesses need to plan as they move ahead.
So here's hoping the 113th Congress will put the needs of the people ahead of political jousting. Of course there are real disagreements at the root of this impasse, but we need cooler heads and calm action. We need tax reform that provides the amount of revenue we need to pay for the government voters demand. We need a transparent conversation about which government services people are willing to forgo in the name of a smaller federal government, if that is what they want. And we need both sides to be willing to work together and actually lead.
The solution cannot be no reduction in services and no increase in revenues. Something has to change. The status quo won't cut it. The era of low-tax big government is over. Deficits do matter. We need a civil, productive, meaningful conversation about hard choices or else we'll never stop facing, and falling off, fiscal cliffs.