At this late hour on New Year's night, the word is that the House is likely to pass without change the Senate bill to, as they say, "avert the fiscal cliff." There are two pieces to the "fiscal cliff" -- tax increases and spending cuts. One is significant; the other is not. It appears that the bill that will be passed addresses only the part that is not significant, and totally fails to address the part that is significant.
The part that is not significant is tax increases. Tax increases are not significant because the cost of government spending will come out of the rest of the economy no matter what. Today's spending can be paid for in only three ways: today's taxes, tomorrow's taxes (i.e., the children will pay it), or inflating the currency. Nobody's ever thought up a fourth option. If you have one, write your congressman. I'm 62, so whatever they don't get out of me in the next couple of years is going to the children. Should I feel good that the tax increases on me for a couple of years aren't quite as bad as they might have been? Without spending cuts, it only means that my kids are going to get the bill, or the even worse alternative, that a massive inflation will destroy both my retirement and their ability to make their way in life for decades. My older daughter asks, given that they think they can spend without regard to the level of revenue, why do they bother to tax at all? It's a very good question.
So the only important part of the deal is the spending cuts. Well, it seems that they have skipped that part. CBO appears to be touting numbers of $10 billion or so (over 10 years!) of spending cuts, but no amount of searching by me seems to be able to turn up any actual example of what's getting cut. Well, assume that there actually will be $1 billion or so per year of cuts on $3.7 trillion of spending, or maybe .03%. Is this a joke?
The CBO's numbers project $600 billion or so of revenue (over ten years) from the tax increases, or $60 billion +/- per year. I don't believe these numbers, since the revenue supposedly comes from a handful of people from whom evasive action can be expected. But assume that the figure is right. Then it is about 6% of the projected cash-basis deficits. Starting, say, tomorrow, January 2, it is going to be immediately obvious that they have not even started to address the bulk of the problem. Are we going to do anything about the other 94%, or just ignore it?
A president who had even the tiniest element of competence would see it as the core of his job to put forth specific proposals to get the spending under control. I do not believe that Obama is going to do it. I think that he is fully in the thrall of Fake Keynesianism, that he believes firmly that all government spending is good, no matter how wasteful, that more is better, and that the government creates the wealth by printing and passing out the fiat currency. In other words, he is totally, completely, utterly incompetent. I want to be proven wrong, but I don't think I will be.
Finally, just a small word on the so-called projected revenue from the deal. Taxes on capital gains are going up to the extent that income including the gains exceeds $450,000 for a couple. Do they understand that the realization of capital gains is hugely discretionary, and you can manage them to take them when it is most advantageous? If your income is going to be above $450,000 this year, then borrow against the asset this year (not taxable) and sell it next year or the year after when your other income is lower. A few people (e.g., divorces) will not be able to manage things perfectly, but almost every dollar of so-called projected revenue from this capital gains tax increase is illusory. Sorry. And that's just one example.