by: Joe Lazauskas
Democrats and Republicans are currently playing a giant game of chicken and racing towards a fiscal cliff. It’s like a bad Nicholas Cage movie, except if things don’t end well, you’ll leave the multiplex to find the United States in a brutal double-dip recession.
On January 1st, 2013, all Bush-era tax cuts are set to expire, a date political analysts are calling “Taxmaggedeon.” Such a sudden increase in taxes would slow the economy and, in all likelihood, create that double-dip recession.
In order to avoid Taxmaggedeon, Republicans and Democrats in Congress need to agree on a tax plan to go into effect before the January 1st deadline. To most Americans, handling taxes and the national debt are the biggest issues in this election. The new tax plan will impact them in their wallets and at their workplace, because the new tax plan will certainly have an impact on job creation and security.
The new tax plan has to take into account not only our economic revival and national interests but also the national debt. In 2000, the United States had $236.2 billion more than it owed, but by late 2008, the United States owed $10.6 trillion more than it had. Due to economic stimulus measures that required the US to take on more debt, the national deficit has soared to over $15 trillion.
First off, don’t worry. The United States’ creditors won’t start banging on the White House’s door demanding their money, as a big, scary dude named Jimmy yells death threats into the Oval Office window. But those creditors are enjoying collecting interest on our debt, and economists agree that the United States needs to get its debt problem fixed.
In order to fix the debt, the federal government needs to look at how much money they’re making from taxes and other revenue and say, “I’m going to spend less than that.” But as any Kardashian will tell you, sticking to a budget is easier said than done, and unfortunately, the United States isn’t likely to get rich by being a swimsuit model, though Uncle Sam does look great in a bikini.
In lieu of a Sports Illustrated cover, coming up with a new tax plan is the best first step.
+Okay! So what kind of tax plan is each party proposing?
Both sides want to extend most of the Bush-era tax cuts. Where they differ is that Democrats only want to extend the tax cuts for individuals making under $200,000 a year or married couples who make a combined $250,000 a year. Republicans want to extend the tax cuts for people making up to $1 million dollars a year, and eliminate several middle class tax cuts. Economists estimate that the average middle-class family would pay over $2,000 more in taxes each year under the Republican plan.
Democrats also want to raise the Capital Gains tax from 15% to 20%. Because capital gains are taxed at a lower rate than regular income, wealthy Americans often pay themselves through capital gains instead of a traditional salary.
Recently, the Tax Policy Center evaluated Governor Romney’s tax plan and declared that—even under the most favorable conditions--it is “mathematically impossible” for his proposal to work while remaining deficit neutral (deficit neutral=USA doesn’t take on more debt). Governor Romney’s plan says that eliminating tax deductions would compensate for the tax cut for the country’s wealthiest Americans, but the Tax Policy Center found that Governor Romney would have to eliminate two-thirds of current tax deductions, which would result in a large tax hike for middle-class workers. Others have criticized Obama’s tax plan (which would place more of a tax burden on households making over $1 million) for potentially scaring off investors for new businesses. Since wealthier people are more likely to invest in new industries, it could negatively impact job growth.
+And what about all that pesky debt?
Jay-Z would say money ain’t a thang, but for the US, it definitely is a thang. A big thang.
Let’s imagine a hypothetical situation. Say that the United States balances its budget to the point where we’re taking in $236 billion more than we’re spending, like we did in 2000. And we keep doing that every year, while the interest rates on our debt remains the same. It would still take us 66 years to pay off all that debt.
While the debt problem is serious, other nations have it worse. The magnitude of a country’s debt problem is usually measured by comparing public debt to a country’s total gross domestic product (GDP)—the value of all goods and services that the country produces each year. According to The Economist’s awesome/terrifying real-time Global Debt Clock, the US’s total public debt is 69% of its GDP. Other countries are worse, like Japan (200.5%), Italy (120%), Portugal (88.4%), Sudan (96%), France (87.4%) and even Canada (82%).
Last year, the United States’ credit rating was downgraded from AAA to AA+ by Standard and Poor’s, amidst in-fighting in Congress over whether to raise the US debt ceiling, even though not raising the debt ceiling would have resulted in the US defaulting on all its debt—a total economic catastrophe. Even though the US credit rating was downgraded, investors have largely ignored the downgrade and continued to invest in US treasuries.
Standard and Poor’s has warned that the US may be in for another downgrade in 2014 if Congress doesn’t come up with a serious plan to tackle the national debt.
Neither Presidential candidate seems to have an answer. As noted above, Governor Romney’s tax plan will not result in a balanced budget without giant tax increases for the middle class; Democrats have positioned their tax plan as the best solution to aid the economic recover in the short -term, and as part of their long-term plan to reduce the deficit, though the Democrats tax plan does not appear to be deficit-neutral by balancing budget cuts. Basically, a cocktail of tax increases and budget cuts is what we need, but neither side can agree on how much of each.
+What can I do?
If you’re interested in reducing the national debt, get involved with the National Commission on Fiscal Responsibility and Reform, a bipartisan group created by the President to tackle the national debt head on.
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