Over six months ago, in a blog entitled The Fiscal Cliff: Thelma and Louise?, we predicted that “as the nation nears the Fiscal Cliff Washington DC will either show extraordinary political leadership and a spirit of compromise or go over the cliff into partisan polarization that will invite economic disaster.”

We went on to say that a post-election, “lame-duck” Congress would have about six weeks “to get behind the steering wheel and drive toward the Fiscal Cliff—hopefully ever mindful of Thelma and Louise!”

Turns out we were right on both counts: One, our country needs extraordinary political leadership and a spirit of compromise. Two, Washington DC is driving at top speed toward the Fiscal Cliff. If the President, Senators and Representatives of both parties can’t or won’t compromise their partisan positions our government, like Thelma and Louise, will drive the country right off the cliff. Read more.

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The Fiscal Cliff: What’s It All About?

Tue Dec 4, 2012

Over six months ago, in a blog entitled The Fiscal Cliff: Thelma and Louise?, we predicted that “as the nation nears the Fiscal Cliff Washington DC will either show extraordinary political leadership and a spirit of compromise or go over the cliff into partisan polarization that will invite economic disaster.”

We went on to say that a post-election, “lame-duck” Congress would have about six weeks “to get behind the steering wheel and drive toward the Fiscal Cliff—hopefully ever mindful of Thelma and Louise!”

Turns out we were right on both counts: One, our country needs extraordinary political leadership and a spirit of compromise. Two, Washington DC is driving at top speed toward the Fiscal Cliff. If the President, Senators and Representatives of both parties can’t or won’t compromise their partisan positions our government, like Thelma and Louise, will drive the country right off the cliff.

This blog starts a series of December blogs leading up to whatever last-minute decision Congress and the President ultimately hammer out—either the optimistic scenario of avoiding the Fiscal Cliff or the pessimistic scenario of driving off it. We’ll start with an explanation of what all the fuss is about; then address the tax revenue piece of a solution; then the government spending piece; then the idea of “tax reform” to raise needed revenue and simplify the tax code; and then finally describe whatever compromise lawmakers agree to—probably on Christmas Eve.

What is this Fiscal Cliff everyone seems to be talking about?

First of all, it’s not really a “cliff” at all. “Fiscal Cliff” is a term Federal Reserve Board Chairman Ben Bernanke coined earlier this year to describe the box into which Congress and the President needlessly put our government during deficit reduction negotiations last year.

At that time, with a looming downgrade of Treasury debt and republicans and democrats unwilling to compromise on a longer term plan to reduce the government’s annual $1 trillion deficits and $16 trillion gross public debt, Congress and the President invented an “automatic” $600 billion deficit reduction mechanism to be triggered on January 1, 2013 in the absence of alternative spending cuts and revenue increases. The mechanism is automatic because all the income tax rate cuts enacted in 2001 and 2003 and extended in 2010 are scheduled to expire on December 31, 2012. It’s automatic also because the law Congress passed in 2011 creating this fiscal box programmed into January 1, 2013 a series of cuts in defense and domestic government spending known as “sequestration.”

While estimates vary, at least $500 billion in tax increases and $200 billion in spending cuts would take effect this January 1. The average person’s tax bill would go up next year by around $3,000, including expiration of the 2011-2012 payroll tax holiday.

Predictably, politicians decided to wait until after Election Day to decide how to reduce the government’s gigantic annual deficits. In other words, if democrats and republicans fail to come up with a bipartisan comprehensive deficit and debt reduction plan, on January 1, 2013, roughly three weeks from now, Washington DC will fire a double-barreled shotgun—abrupt tax hikes and spending cuts—that will cripple job creation and stall economic growth.

Why did Congress and the President put our economy in this box? Why is it so difficult to reduce the federal government’s budget deficits by cutting government spending and raising taxes?

Part of the answer is that our government’s deficit situation has finally gotten out of control. Budget deficit after budget deficit, year after year, America’s public debt has become so mammoth that in some ways it cannot be stopped without damaging the economy. Another part of the answer is that liberals and conservatives have become so wedded to their own doctrines about spending and taxing that they find it difficult to compromise.

That will be the subject of our next blog. Stay tuned!