The Fiscal Cliff

For years the Congressional Budget Office (CBO) has been warning that the federal government's fiscal course is "unsustainable." And for just as long, Congress has refused to do anything about it, preferring to defer and delay whenever possible. 

Unsustainable spending of the money involuntarily extracted from taxpayers does little to promote any sort of responsibility by career politicians who are simply replaced by others just like them on a regular basis. Where is the incentive to do anything productive?

The consequences of congressional irresponsibility have been mounting all the while: four years of $1 trillion deficits, a $16 trillion federal debt [and always rising], and a slew of temporary tax policies. Even routine fiscal decisions have been neglected: For more than three years the Senate has declined to pass a budget, perhaps fearing what an honest assessment of the government's fiscal situation might show. 

It is easy to see why Congress is so keen to ignore these issues. The biggest single driver of the federal debt is Medicare, which faces $38 trillion in unfunded liabilities and is expected to become insolvent by 2024 under even the most accommodating estimates. Social Security, a program that has been running annual operating losses since 2010, faces $20 trillion in unfunded liabilities. Federal spending on Medicaid is scheduled to double by 2022 under Obama-Care, and defense outlays are set to grow by more than $100 billion during the same period even if proposed "cuts" take effect. The long term gap between spending and revenue is a problem that affects nearly every piece of the federal government, and as CBO Director Douglas Elmendorf said in 2010, it "cannot be solved through minor tinkering."

It's amazing that everything hasn't already come tumbling down.

This fiscal Jenga tower starts to come crashing down on January 2, when inaction-as-usual will suddenly become a major policy decision. Starting on that day, several of Congress' kick-the-can games are scheduled to end: A temporary payroll tax cut expires, raising taxes by $95 billion if it is not extended; an estate tax cap disappears, multiplying the number of Americans hit by the tax tenfold; and the income tax rates that were reduced under President George W. Bush return to their 2000 levels. According to an October study by the Tax Policy Center, that last change would affect 90 percent of American households, with average marginal tax rates jumping by five percentage points on labor earnings, seven percentage points on capital gains, and 20 percentage points on dividends. 

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