My Personal View on the Fiscal Cliff

Numerous readers have emailed and asked me a personal question: “What would YOU like to see happen with the fiscal cliff?” We thank you for the question.

Please remember, this missive will not be about what is going to happen. We do not know that outcome and neither does anyone else. We hold an opinion that there is a deal coming. We think it will be at the 11th hour or even early next year after we tumble over the January 1 cliff. But that is just an informed guess. President Obama didn’t add much clarity to that view in his Bloomberg interview today. Readers may see it and hear it on Bloomberg.com.

Instead, today’s letter is about what we would like to see happen, and why. My view is simple: until we experience the cliff, we will not understand what it really means. Hence, we will not act wisely if we do it prospectively.

We believe the markets and citizenry are too complacent about our government. US investors are used to watching the Washington charade. Voters, in nearly every congressional jurisdiction, are trapped by limited choices, which is why we re-elect most incumbents. Our politics are the politics of default choices.

Our markets are driven by forces such as low interest rates and global demand and geopolitical risk. We go on about our daily business in spite of our broken government. We engage in a collective trillion economic decisions each and every day, without government help. Leave us alone and we can pretty much figure out what to do.

We have a broken political system, in which our leaders are about as popular as the proverbial used-car salesperson (according to recent polls). Most of us feel that way about them but cannot do anything about it, so we go on with our lives and let the self-serving “leaders” in Washington decide our fate.

One defining characteristic of Americans is to rally in time of crisis. We do that in wartime. We do that with natural disasters like Katrina and Sandy. We do that with regard to health matters. We are generous with our charity. Mainstream Americans are mostly good folks. But we are reactive, not proactive.

So, let’s see if we can rally to deal with this government crisis. But we won’t do it unless and until we know we have a real crisis on our hands. So, let’s have at it. To get there, we need to go over the cliff and stay there long enough to actually begin to experience what it feels like, and what it means, to be off the precipice.

Let’s see what happens when all the income tax credits expire on lower incomes and when 140 million Americans get hit with an average $1000 a year in a payroll tax hike. Let’s see what the experience is when sequestration kicks in hard. Let’s watch the layoffs of defense contractors who have to downsize since they won’t be paid by the federal government. Let’s tax capital and dividends and income at high rates and let our citizens begin to feel the impact in their pocketbooks. Let’s tax estates at confiscatory rates. Let’s allow tax-free bonds to be penalized when our schools and sewer systems need financing. Let’s subject 24 million folks to the alternative minimum tax. And on, and on, and on.

The political morons generalize in their pronouncements because they fear giving us real details. Our president repeatedly attacks the rich with class-warfare rhetoric. He says upper 2% of income but he doesn’t say that many are independent businesses. Does he ever mention an S-Corp small business that is trying to accumulate capital to grow a business and hire folks? Many small businesses finds themselves burdened with a marginal effective tax rate above 50% under the present tax system – before we even go over the cliff? That is where a small business can find itself when all taxes imposed are combined.

Obama avoided this detail today. He cited CEOs of big companies. He ignored the half of the country that is small and independent firms even while claiming that 97% of them will benefit.

Obama uses the new-age definition of millionaire: a couple filing a joint income tax return with a $250,000 annual income. He never mentioned that his failure to compromise means the lower-income tax groups will incur a very high tax hike once we’re off the cliff. He never admits that some of the lower middle-class tax rates he claims are obtained are in place by using the deception of credits.

The Republicans are not any better. Republicans never say, “We defend the 15% carried interest provision.” They never explain the details by which many wealthy Americans benefit from provisions in the tax code that are engineered to benefit the few at the expense of the many. They just say no changes in tax rates. And now they are clamoring for “revenue,” which means changing the tax code, not the rates.

Readers, please note, it is the effective tax rate that really counts. Let me repeat and add clarity. It is ONLY the effective tax rate that counts.

Both Republicans and Democrats are disingenuous. That is a nice term for lying to us and deceiving us and using fuzzy language to mask the truth.

So, my personal proposal is to have a major fight and a resulting stalemate that persists until there is real pain in the land. I would like to see my fellow citizens get really angry with Washington and set aside their partisan differences and then throw out some of the bums of both parties.

I would like to see us get mad enough and scared enough and clear enough about what’s really happening to us, that we realize we have to pull together to claw our way back from the cliff and get this country on stable ground.

Let me invoke a scene from a movie that will date me. What I want you to do is throw open the window, stick out your head, and yell “I’m mad as hell and I’m not going to take this anymore.” If you are too young to remember the movie, Google the phrase and watch the scene (YouTube will take you there).

That is what I would like to see happen, dear readers. We need to open our windows and yell. Get 314 million of us angry enough at our government, and we will stop this nonsense. Unless we get that angry, this broken-down system of ours is going to go clickety-clack right off the cliff.

Happy holidays to all cliff dwellers (us). Get angry. Tell your congress people that you’re angry. Whether you’re Democrat or Republican, be angry, be clear-headed, and demand the truth. It’s our country!

Thank you for asking.

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About David Kotok 42 Articles

Affiliation: Cumberland Advisors

David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a masters in philosophy from the University of Pennsylvania.

Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron's, and other publications. He is a frequent contributor to Bloomberg TV and radio, CNBC TV programs, Fox Business, Yahoo Finance and others.

Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series, and organized a five-continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, Prague, Capetown, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen Award from GIC for his efforts.

Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), serves on the Research Advisory Board of BCA Research, and is also a member of the Philadelphia Council for Business Economics (PCBE).

Mr. Kotok has served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.

Mr. Kotok hosts an annual Maine fishing trip, where, it is rumored, most of the nation’s important financial and economic decisions are actually made.

Visit: Cumberland Advisors

1 Comment on My Personal View on the Fiscal Cliff

  1. Instant Employment of 10 million people in the U.S

    Divert the 40 billion a month to employ the unemployed

    40 billion by 10 million people = $500 dollars per week .

    This would be given by small business (5 to 50 workers ) to employ a worker and local government (set up your own guidelines) to employ a unemployed person.

    This provides employment for 10 million people. (Get off welfare)

    Provides increase in retail spending

    Provides increase home buying

    Increases disposable cash for spending in the economy

    Increase tax revenue

    Increase productivity

    Lowers manufacturing costs in some sectors

    Reduces food stamps

    To be put in place for two years for stability and growth

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