Tax and Spend Talk (and Talk and Talk)

It was Benjamin Franklin who said something like: “The only thing certain in life are death and taxes.” He could have added something about the certainty of politicians arguing over how we are taxed. The big argument in Washington these days involves avoiding a crisis being called “the fiscal cliff”. In this so-called crisis, taxes are only half of the issue. The other half involves government spending.

Generally, Republicans and Democrats have very different views about taxation and government spending. Republicans often believe that less government spending is better. They also believe that lower taxes on high-earners (considered job creators) are an incentive for them to create more jobs. Democrats, on the other hand, often feel that it is our duty as a society to use our collective resources to care for the country’s most vulnerable citizens.

Some leaders are concerned that Americans are getting back on their feet after the recession, and can’t afford more taxes. However, a recent analysis issued by The New York Times said that Americans are paying less than they did in the 1980s. Congress has cut federal taxes for every income level over the past 30 years. Americans also pay lower taxes than other countries in relation to the size of the economy.

One of President Obama’s promises during his campaign for re-election was to raise taxes on households making more than $250,000 a year. His latest budget proposal calls for $1.6 trillion in new taxes over the next ten years, in combination with $600 billion in government spending cuts. The Republicans have countered with a proposal that calls for $900 billion in spending cuts and $800 billion in new revenues that come from tax reform instead of increases.

How Did We Get Here?

In the 1990s, the economy was booming and the US Treasury was collecting more money than it needed. This created a surplus that the government used to pay down the national debt at the end of the decade. Fueled by the notion that if the government was collecting more income than it needed, both candidates running for President in 2000 promised to cut taxes. Once elected, George W. Bush kept his promise to cut taxes by reducing income and investment taxes on everyone, including large cuts for the highest earners (from 39.6% to 35%).

Those tax cuts had what was called a “sunset provision”, meaning they would expire at the end of 2010. But when that time came, President Obama agreed to extend the tax cuts until the end of 2012 in exchange for an extension of unemployment benefits.

A challenge comes with the expiration of the Bush tax cuts. The tax cuts will be ending at the same time as something called “sequestration” takes place. This is an effect of the Budget Control Act of 2011, which set up a committee to come up with specific ways to reduce the deficit over ten years. If the committee does not agree or cannot solve the problem, there would be automatic cuts in domestic and defense spending. No solutions have yet been reached and so the cuts may go into effect.

Some experts believe that too many cuts in spending and increases in taxes could result in another recession. Others believe it is an appropriate measure to get our economy back on track. Both sides agree that the end result of these negotiations will have a significant impact, not only on Americans, but on the global economy as well.

What Do You Think?

Do you think we will “go over” the cliff or that we will avoid it? Follow this story, keeping track of what each side wants, the response from the other side, and any compromises made.