Politics: The "Fiscal Cliff" Deal and the Road Ahead

Part I of the drama has concluded: much of the Bush era tax rates were retained with the exception for those $400,000 and up.

Part II of the drama, the spending sequester, was pushed back 2 months.

Part III of the drama, the debt limit will be coming up around the same time as the sequester deadline.

At one time, there was the thought that tax cuts would "starve" spending because the debt would become unbearable.

But, today, going forward, it is equally likely that the massive spending of recent years would "feed" the need for taxes because the debt would become unbearable.

It will be interesting which of the two "narratives" will ultimately win out.

Part II/Part III of the "Fiscal Cliff" drama could result in more taxes or cutting spending or more likely more budgetary shell games kicking the can down the road.

On the spending side, there are essentially three almost untouchable pillars being advocated by Washington:
the elderly in the form of Social Security and Medicare
the poor in welfare programs (Food Stamps, Medicaid and other programs)
the "investments" (college educational loans/grants, Green energy and various other groups with lobbying power in in DC).

As the finances in DC continue to get worse and since there appears to be no willingness to cut much less slow down the growth of the above three areas, there will be no choice but to raise taxes to meet the debts.

With the fight over income taxes just concluded, there are probably two types of taxes soon to arrive: (1) energy tax and (2) consumption tax.

The energy taxes could be based on the energy output of the source to be taxed or on the carbon footprint of the source.

A consumption tax could be in the form of a national sales tax or a European style value-added tax.

At current spending levels, the budget is going to bust and it is time for the politicians and the people to get serious about either cutting back on the programs or honestly paying for them with more taxes.

Who is going to have the profile in courage to tell that truth?

One can hope for a "balanced" approach of spending cuts and tax increases but so far the tax increase side has won all the battles to this point. But of course, taxes haven't increased enough to compensate for the even bigger increases in spending that have occurred in the last decade.

UPDATE:  This author thinks the "starve" the beast side is winning.

We shall see how the Part II/Part III "fiscal cliff" drama plays out. I think the author is rather optimistic about the GOP ability to keep fending off the pressure on tax increases and capability to get spending restraint. In part II/part III, don't be surprised if there are calls for eliminating and reducing some deductions within the income tax to raise more revenue in addition to introducing the two new taxes mentioned above. One can also raise the payroll tax components of either or both Social Security and Medicare. There are no shortage of ways to raise taxes! The question is whether there will be any movement at restraining the growth of spending?

Feed the tax machine or starve the spending beast?

As it stand the debt burden falls to future generations.