BY ADEYEMI OSHUNRINADE
Simply put, the fiscal cliff is a flattened U.S. economy. It is like a car at the tip of a mountain that slipped over and crashed. An economic situation no one wants to see and a reason why immediately after his reelection, President Obama called on Congress to act now to prevent the looming bubble from bursting. Think about a situation in one’s life when you had to cut back on virtually everything you enjoyed and loved such as, your cable, eating out, movies, expensive clothing and the like. You impose aggressive austerity measure on yourself, in an attempt to reduce debts and stabilize your economic situation by cutting back.
The above scenario is exactly what may happen to the U.S. economy if the fiscal cliff issue is not resolved. Already the market is showing scare, stocks are down since the reelection of Mr. Obama because Wall Street is unsure if U.S. Congress will fix the problem before the January deadline. With the Senate and the House evenly divided, it seems the only way to tackle the looming bubble is to find a middle ground through a bipartisan approach. Unless both sides are willing to compromise, America may slip into another recession come January 2013, if the Bush Era tax-cut is allowed to expire.
Yesterday, the President made it clear speaking in front of small business owners, union leaders and middle class working Americans that he would not allow only college students, the elderly and the middle class to pay down the nation’s debt, while the rich and people like him who make more than $250,000 a year see no increase in their taxes. The President noted that recently, the Senate passed a bill to extend tax cuts to the middle class but excluded income over $250,000 a decision to which he offered his opposition. “All we need is action from the House. I have got the pen. I’m ready to sign the bill right away. I’m ready to do it,” he said.
Mr. Obama sounded his willingness to compromise and work with members of both Houses to strike a deal, that would find a solution to the fiscal cliff. However, he made it clear he would not agree to any plan that will exclude a tax hike on the wealthy or short of a balanced approach. “That’s how you reduce the deficit, with a balanced approach so our job now is to get a majority in Congress to reflect the will of the American people,” he said. With that the President referred to his election victory in which a majority of Americans voted for him across party line, a reflection of the direction Americans want the country to follow.
House Majority Leader Mr. Boehner expressed his willingness to work with the President on resolving the issue but maintained opposition to any increase in the tax rate currently in place. Mr. Boehner in line with the GOP stand prefers taxing revenue to having a tax rate hike. “Raising tax rates will slow down our ability to create the jobs everyone says they want,” he said. He claimed that imposing higher taxes on the rich will hit small business owners and cause job loss.
With the fiscal cliff approaching, it is clear both parties must find ways to resolve the issue to prevent an economic catastrophe. A failure by Mr. Boehner and his conservative gang to compromise may be seen as an attempt to push aside the wish of the American people, which was clearly stated by the results of Tuesday’s election. Mr. Obama campaigned to have wealthy Americans pay more to deficit reduction, he pledged to protect the middle class by cutting taxes on them and he promised them they would not see a tax increase if elected. To now go against what he campaigned on will not sit well with voters, Boehner’s proposed tax reform had been deemed unrealistic as it is the kind proposed by failed Republican candidate Mitt Romney. So what will happen if both sides decide not to act?
The result is that the Bush Era tax cut will expire and every American both rich and poor will see their taxes go up in January. Those with average income of $50,000 a year will end up paying about $2,000 in taxes, a move back to the Clinton period tax rate of 39%. There will be an end to payroll tax holiday and extended unemployment benefits. All these of course, will be followed by spending cuts to both Medicare and Medicaid. The debt ceiling- which sets the spending limit and borrowing capacity of the Federal will require an increase from its current $16.394 trillion, which means taking more debt in addition to the trillions in deficit.
Automatic deficit reduction will be required, this would trigger the “sequester,” a general cut in government spending that may burden millions of Americans already dealing with the aftermath of the crisis. The goal would be to cut back and in doing so the Federal, will require harsh austerity measures which if not implemented, may lead to an increase in public debts. Unemployment will rise as businesses feeling impact of a tax hike may choose not to hire. Capital gains rate would see an increase to 20% from 15%, child tax credit falls from $1,000 per child to $500 accompanied by a reduction in the refundable portion. Among many other spending cuts to be expected, Social Security will also see a tax rate increase to 6.2% up from 4.2%.
Obviously there is urgency here, both parties know the only way out is a bipartisan approach that would cut spending and reduce the deficit, by generating revenue, through a new tax code that creates no burden on the middle class. The only way out is to ask wealthy Americans to pay more in taxes and then work out a model for reducing the deficit, which is what the Obama administration is proposing. So far, the President has promised to veto any bill that extends the Bush Era tax cut to those making $250,000 or more a year. If the GOP wants to respect the mandate of November 6, it must adopt a spirit of compromise and work out a deal with the Obama administration that would stop a tax hike and sequester in the year ahead.
The President may decide not to act if he continues to hit a gridlock from the House. The result is everyone’s taxes go up come January, a move that will not only destroy people’s confidence in the GOP, but also, may doom its future aspirations for the highest office.
Dr. Adeyemi Oshunrinade [E. JD] is the author of ‘Wills Law and Contests,’ ‘Constitutional Law-First Amendment’ and ‘SAVING LOVE.’ Follow on Twitter @san0670.