Johnson: Yep, the 'Fiscal Cliff' Is Good for the Economy
Investors have been forewarned that the economy would suffer unspecified injuries from the blunt force of obstinate politicians if we fell over the "fiscal cliff." Perhaps, but these events might ultimately prove to be a fortunate byproduct of an untidy ideological debate.
Despite the dire consequences of inaction, there hasn't been a better opportunity to revamp the tax code and address deficit spending in quite some time. For whatever reason, people tend to compromise when the exit door is locked shut.
As one dissects the means by which the government generates revenue and how it spends the proceeds, we're not so bad off. Truth be told, the increasing expenditures are a direct result of the rising cost of entitlement benefits, as people are living longer and health care costs have been skyrocketing for decades.
And contrary to popular belief, our nation is not deluged by high taxes. Per the OECD, the tax burden of the United States (federal, state and local) is the second lowest amongst the 34 industrialized countries and the United States collects less corporate tax relative to the overall economy than almost any other country in the world.
What can be said is that Americans must decide what they're willing to pay for with borrowed money. The mortgage interest deduction is not only expensive, but Canada has a higher rate of home ownership without any help from the government. Even if deductions are capped at $25,000, tax revenues would increase by $1.3 trillion over the next 10 years, starting at $70 billion in 2013.
The estate tax law allows beneficiaries to inherit assets at a stepped up cost basis, effectively eliminating any tax exposure on the accrued capital gain. Per the Joint Committee on Taxation, abolishing this tax break would create an estimated $41 billion in annual revenue to the treasury.
Said revisions would trim a respectable chunk from the budget deficit before any impact is felt on the military ($662 billion a year), low capital gains and dividend tax rates ($110 billion a year), the annual $48 billion in Medicare and Medicaid fraud or allowing the Bush tax cuts to expire on incomes over $500,000 ($315 billion over a decade). Furthermore, there will undoubtedly be cuts to social programs and additional tax revenue from a growing economy.
It's not unreasonable to think we could cut the deficit in half.
The necessary fiscal space that a government needs to address financial shocks is currently lacking in the United States and an unprecedented window of opportunity is staring Congress in the face. This has not been lost on the top CEO's who are petitioning elected officials for a swift resolution because the Fiscal Cliff would have awful consequences. Big businesses has seemingly heeded Warren Buffett's famous two rules: #1 is to never lose money and #2 is to never forget rule #1.
Excessive national debt is an impediment to growth and prosperity because it crowds out private enterprise and incurs mounting and unsustainable interest payments. Once this cloud of suspicion about America's commitment to pay its bills and limit spending is moderated, perhaps some of that $2 trillion sitting on the sidelines will get reinvested and the economic recovery can gather speed. The can of gross fiscal incompetence has been kicked to the end of the cul-de-sac, and now lacking the requisite wiggle room, a solution might very well be forthcoming.
Ivory Johnson, CFP, ChFC, is the Founder of Delancey Wealth Management, LLC. Previously he had been the director of financial planning at Scarborough Capital Management, Inc. Mr. Johnson has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.