The Free-Fall and the Fiscal Cliff

As the automatic tax increases and spending cuts of the so-called “fiscal cliff” near the horizon, political pundits continue to argue whether the government should solve its budget woes by reducing spending, raising taxes, or some combination of the two. Even the President has engaged with the trendy narrative of taking a “little more” from “wealthy” Americans to repair the budget.

Unfortunately, the reality of America’s fiscal situation has little connection to popular political opinion. Washington’s problem is excessive spending. Period.

A cursory review of federal tax and budgetary numbers reveals bipartisan spending that is so far detached from tax revenues that even confiscatory tax increases on the wealthiest Americans would fail to balance the budget.

Internal Revenue Service (IRS) filing information for tax year 2009 provides interesting data concerning the “millionaires and billionaires” who supposedly hold the key to America’s fiscal solvency. Slightly more than 235,000 income tax returns were filed with taxable income of $1 million or more. Those returns accounted for more than $623 billion in taxable income which garnered over $177 billion in federal income tax.

In 2009, the federal government ran a deficit in excess of $1.4 trillion. A slight tax increase on the “wealthy” would have barely registered in the 2009 federal budget. Even if the IRS had confiscated 100 percent of the taxable income from millionaire filings, the additional revenue would have only reduced the deficit by roughly a third.

Yet, in spite of the hard numbers, some Americans seem to believe that the country could still tax its way out of its current spending practices by just expanding the definition of “wealthy.” Again, the tax data suggests otherwise. If the government demanded ALL of the taxable income from tax returns with adjusted gross income of $200 thousand or more, Washington still would have produced a deficit in excess of $215 billion in 2009. Even if these confiscatory tax policies would solve the problem, there is no political will on either side of the aisle to see them implemented.

If Washington politicians want to keep spending, leave entitlements unchanged, and take any serious steps to rein in the national debt, not only will they be required to heavily tax the “wealthy,” but they will be forced to reach deep into the pockets of middle class Americans.

Regardless of marginal tax rates, Republicans and Democrats have spent every penny raised in revenues and then some…to the tune of $16.3 trillion in national debt. Since 2009, federal politicians have buoyed the economy with well over $1 trillion in borrowed money each year. To suggest that America is heading toward the edge of a “fiscal cliff” is blindly ignorant of the nation’s current fiscal free-fall. The upcoming tax hikes and automatic spending cuts would be more effectively described as handing the country an anvil on the way down.

Every American who has stopped spending on credit understands the pain of moving to live within their means. The shock of removing deficit spending from the American economy quickly would likely be substantial. Eliminating 2009 deficit spending by the federal government would be roughly the same as eliminating the entire 2009 economic production of Alabama, Arkansas, Louisiana, Kentucky, Mississippi, South Carolina, Tennessee and Virginia from the nation’s bottom line. Winding down the trillion dollar deficits of the last several years requires tough decisions to end well-intentioned government programs and strong political leadership over time.

Politicians may narrowly avoid the upcoming “fiscal cliff,” but, without sustained spending reductions that actually result in a budgetary course correction, America may have precious little time to avoid the long-term crash landing from the current fiscal free-fall.

Cameron Smith is Policy Director and General Counsel for the Alabama Policy Institute, an independent, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.