Tags: fiscal | cliff | tax | rates

Fiscal Cliff Debate Does Not Address Structural Problems

Wednesday, 21 Nov 2012 07:55 AM

By Ashish Advani

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One cannot pick up any media release these days and not read about the fiscal cliff and what it can do to the U.S. economy and by extension the global economy.

For all those who do not understand the real meaning of the fiscal cliff, we have to revisit August 2011, when the foundations of the fiscal cliff were formed. As usual, the United States was approaching the limits of how much debt it can have. Democrats wanted the limit of total debt increase, while the Republicans wanted to extract as much blood, as well as embarrass the Democrats, before they gave in.

A super committee was formed to enact automatic cuts to the spending programs should the two sides not reach an agreement. The parties overestimated the ability to reach a compromise. Both parties did not want to agree on anything, and as a result created a program of cuts that would cripple the country’s economy. The plan was to never enact these cuts and reach a compromise before the deadline.

The bill was passed on Dec. 23, 2011, for cuts to go into effect on Jan. 1, 2013. Both parties did what they do best — kick the can down the road hoping for a miracle agreement in the meanwhile.

Fast forward to this year’s presidential election — President Barack Obama was re-elected and Democrats still control the Senate, while Republicans still control the House. The United States spent $6 billion and got more of the same.

Now the far out date of Jan. 1, 2013, is not that far away. No compromise yet in sight. The fiscal cliff is now a real threat, not just a challenge to be addressed later. Various estimates that are floating around indicate that the economy will shrink by 1.5 to 2 percent of gross domestic product if these cuts actually happen. While we might see a compromise after this game of brinksmanship, I am stunned at the shallowness of the debate and that no one is talking about the actual issues at hand.

Currently, if the fiscal cliff happens, we will see one of the largest tax hikes in the history of the world enacted. Dividend income tax will go up from 15 percent to 39.6 percent (plus a 3.8 percent tax for those in the highest-income bracket to pay for Obamacare), and estate taxes will go up from 15 percent after the first $5 million to 55 percent after the first $1 million.

And corporate taxes in the United States are already one of the highest in the world. Corporate tax rates are about 35 percent plus state taxes and whatever else the government can milk out of its honest citizenry. In some of the other thriving economies like China and Germany the corporate tax rate is 15 percent. If that is not enough, the tax code is so complex and huge, that the Government Printing Office charges anyone who wants a copy a whopping $1,028 to print a single copy.

Oh! By the way, China has been reducing the taxes on its citizens, and the new incoming leadership has decided to charge 5 percent on dividend income starting Jan. 1.

We call China a communist country and the United States the world’s largest and most capitalist economy in the world. I beg to differ!

Fiscal cliff or not, unless we reform our tax code and actually care to stimulate business in the United States, we will face such cliffs over and over again. Until then, we are our worst enemies since the high tax rates force our own U.S. companies to retain their profits overseas, invest in research and development and buy other companies and grow them to compete with U.S. companies on shore.

Time to move our personal investments from the U.S. company stocks to companies that are growing overseas and benefiting from good tax and government policies.

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