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FALLING OFF THE FISCAL CLIFF

The federal debt, as this edition goes to press is $16,337,536,311,431.61,  according to the Brillig.comdebt clock. The Congressional Budget Office (CBO) says that in 2012 alone, Washington ran a $1.1 trillion deficit http://www.cbo.gov/publication/43656, the 4th year in a row with an over $1 trillion deficit.

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FEDERAL REVENUES
 The mammoth and growing federal debt is not the result of a lack of revenue.    In 2012, revenues were up by 6%.  According to usgovernmentrevenue.com, all government revenue in the U.S. has increased from 7% of GDP in 1902 to over 35% today. 
According to the Congressional Budget Office, (CBO) in fiscal year 2011, the federal government took in $2.3 trillion, but spent $3.6 trillion. That spending amount is a record high, even exceeding the maximum level during the World War II years (which was, in constant 2011 dollars, a comparatively puny $1.7 trillion, according to the Heritage Foundation.)
As the CATO institute notes, “[W]ithout reforms, rising federal spending will fundamentally reshape America’s economy…the long term debt problem…is caused by historic increases in spending, not shortages of revenue.”
The numbers ratify that point.  Federal spending rose from 18.2% of GDP under President Clinton to 24.1% this year, and projected increases point to a jump up to 33.9% in 2035.  CATO notes that by that time, “government will consume more than half of everything produced in the nation.” 
Former Vice Presidential candidate Paul Ryan noted that “the federal tax code as currently written will become a kind of ‘revenue machine,’ claiming ever-growing shares of individuals’ income and the economy’s resources.”
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BUDGET DEFICITS AS A PERCENTAGE OF GDP
UNDER RECENT US PRESIDENTS
Kennedy -1.0%;   Johnson -0.9%;   Nixon -1.6%;   Ford -3.5%;   Carter -2.4%; Reagan -4.3%; Bush (41) -4.3%;   Clinton -0.1%;  Bush (43) -3.2%;  Obama -8.3%. (source: Heritage Foundation)
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FISCAL CLIFF IMPACT ON THE ECONOMY
Rather than address Washington’s excessive spending, the federal government is on the brink of complying with “sequestration” provisions that will significantly hike taxes on almost all Americans. On the spending side, the largest cut will come from defense, a direct hit on middle income jobs in manufacturing resulting in a negative economic impact and dangerously lowering the nation’s defenses.
The lack of progress on “fiscal cliff” negotiations designed to address America’s budget crisis brings to the forefront the potential impact of extraordinary tax and national security changes. Individual taxpayers will endure hardships from:
  • the end of payroll tax cuts that will result in a 2% tax increase for workers;
  • additional increases from the end of the “Bush Tax Cuts;”
  •  imposition of new taxes resulting from Obamacare, and
  • changes in the alternative minimum tax that will  result in higher tax liability.
The Tax Policy Center  notes that the looming fiscal cliff threatens to boost taxes over $500 billion on 90% of all Americans.
The end of some tax breaks for businesses will cause an already weakened economy to waiver further, and will also guarantee that historically high unemployment rates will continue and grow.  The CBO estimates that unemployment would rise to about 9.1%. 
According to the financial site about.com bonds
“If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic.  While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product by four percentage points in 2013, sending the economy into a recession…At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of two million jobs.”
The report quotes statistics from other economic sources, including the Wall Street Journal, indicating that “$280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts, $125 billion from the expiration of the Obama payroll tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Act spending cuts.”
ARE TAX HIKES A SOLUTION?
Historically, increasing taxes have not been effective in reducing deficits, nor can they be realistically increased to a level that make a significant impact on the annual deficit.
 The Third Way” organization  notes that it’s a myth “that taxes on the wealthy can come close to solving our long-term budget problem…Even if each major Democratic proposal to raise taxes on the wealthy becomes law, the national debt will double as a share of the economy by 2035, and the annual deficit in 2040 will exceed $4 trillion, in inflation-adjusted dollars.”  Even a 50% tax rate wouldn’t work. 
The Third Way study notes that the only way taxes could begin to address the deficit is if, in addition to “soaking the rich,” huge tax hikes are imposed on the middle class, increasing all tax rates on ordinary income by an additional 5  percentage points,  10 points on capital gains taxes, hiking the cap on the social security payroll tax to $170,000, increasing the payroll tax rate for Medicare by 1%, and even imposing a 10% national value added tax. “Even those extraordinary increases only contain deficits through 2022.  The study notes that “Relying on taxes alone to hold long-term deficits at 3% GDP would require phasing in a 60% tax increase on the median-income family, raising its annual tax burden by $6,200 in 2012 dollars.”
As Rep. Ryan has noted, these dramatic increases don’t even take into account the tremendous burden on the federal budget that will be imposed by Obamacare.  Indeed, all the proposed tax hikes would raise only about $170 billion in extra revenue–barely a fraction of what is needed to address what is added to the deficit each year, let alone reduce the standing debt already accumulated. “Under current-law projections by CBO, tax revenue is scheduled to approach an unprecedented one-fourth of GDP by mid-century.” 
The impact on the economy as we reach ever-higher levels of government spending are becoming evident.  The draining of resources from private individuals and private enterprise slows down the economy, increasing unemployment.  With less business activity and less income by individuals, federal revenue sources will begin to dry up, even as government spending increases.  The once-vaunted U.S. economy will descend into a death spiral, similar to what is currently occurring to several European nations. 
For decades, astute observers of the federal budget, including Richard Vedder, Lowell Gallaway, and Christopher Frense have theorized that tax increases actually lead to increased spending, thereby not providing a useful tool for lowering deficits.  Despite this, however, as noted by A. James Meigs in the Cato Journal, “legislators are heavily biased toward increasing spending on individual programs.”  That spending requires greater tax revenue.
There are just 21 days remaining for Washington to accept the intellectual sea-change necessary to rein in the skyrocketing deficit. One of the key roadblocks remains the White House’s ideological beliefs, which favor increased tax rates and significantly lower funding for the military.