Now that the election is over there is talk about "The Fiscal Cliff." The Fiscal Cliff is the term for the combination of automatic tax increases for all Americans when the Bush tax cuts and 2 percent payroll tax holiday expire, the millions of Americans who will be hit with the alternative minimum tax (AMT) if nothing is done, the automatic spending cuts that affect across the board government programs - everything from Defense to food stamps. These spending cuts were put in place when the debt ceiling was raised last year. Something needs to be done before January 1 or there we will go over the cliff.
Should we go over the cliff, there is little doubt that we will go into a recession. However, it is unlikely that we will go over the cliff. I believe the Republican Congress won't be so stubborn about allowing the Bush tax cuts to expire on wealthy individuals now that President Obama has won re-election. Spending cuts, tax increases, and closing of tax loopholes are all needed to put the fiscal house in order. President Obama offered $3 in spending cuts for $1 in tax increases and the Republican Party bailed out of discussions. During the presidential primary race, the Republican candidates refused to even allow $1 in tax increases for $10 in spending cuts. If the Republican Party takes that position nothing will get done.
Frankly, the solution is fairly simple.
1. Allow the payroll tax holiday to expire. That will shore up Social Security and Medicare with the 2 percent FICA increase (back to normal levels).
2. Increase the cap on taxable income that gets hit by FICA from about $110,000 to $200,000 (right now, anyone making over $110,000 pays the same as those making $110,000. This will further shore up Social Security and Medicare and create larger surpluses in these programs that can be applied to the budget deficit.
3. Allow the Bush tax cuts to expire on those making over $250,000/year. This will bring billions into the U.S. Treasury. Adding the 3 percent income tax to wealthy Americans won't really have any major impact on their lifestyles.
4. Cut defense spending by about $100 billion/year over the next 3 years. Most of this could be done by ending the war in Afghanistan and no longer having to replace worn out fighting equipment at such a fast pace.
5. Implement a 10 percent cut in spending to all agencies that are funded with more than $30 billion/year. This could be phased in over 3 years also. This would force agencies to try to work to become more efficient.
This would just be the start. I would look to end all tax subsidies and tax breaks for companies making more than $500 million in profit and consider changes to capital gains taxes (some higher, some lower). We just need people of good faith and common sense to come together. The other thing is that none of the changes has to be permanent. If something doesn't work you go back and change it, we just need to have significant change.