The Fiscal Cliff

Foundation for Better Government

(www.bettergovt.blogspot.com

November 28, 2012.

The Fiscal Cliff

By T.S.Khanna, November 28, 2012.

The set back in a democracy is that there is no safety net against the collective judgment of the people when it works against them.  Democracy can create problems which may not be resolvable by democracy.

$6 billion strategically used could trigger tailwinds for the sagged economy, but people preferred to spend the amount in elections resulting in a status quo of power balance of opposing interests.  Like at every presidential election, this election has also caused additional damage to the political relationships between the parties and the people.

Prolonged political economy and representative democracy in the US has created two political cultures getting apart in the core value of economic justice and getting closer to the flash point.

Compromise may be a dirty word in the power circles but it is the sound of music for most Americans.  During this critical period, compromise must be developed with logical and rational considerations.  Compromises by power play will lead the nation astray.

First consideration may be to dispassionately identify, preserve and promote the values that propelled phenomenal progress in the US. Second, in a democracy, certain forces are uniting, others divisive.  The uniting forces are (a) common enemy, and, (b) common interest.  The divisive forces are (a) different languages, (b) different religions, (c) differential looks reflecting race or ethnicity, and, (d) differential taxation rate for varying income levels.

Due to a politically unhealthy level of diversity, the uniting forces are not effective in the US.  The nation is divided nearly 50/50 and there is no mandate for any party.  This is all the more reason for extra consideration to counter the divisive forces.  The first three divisive forces are beyond the scope of this discussion.  On the taxation issue, all effort must bear upon giving equal treatment to all income groups. 

Some suggestions are offered for consideration:

1. Eliminate all loopholes for all income levels;
2. Select and adopt tax incentives with definite measures of effectiveness for periodic evaluation and a sunset clause;
3. Allow twice the poverty level income (currently about $ 25,000/yr. for a family), income tax free for all;
4. Adopt a flat rate income tax of 20% (with state tax not exceeding 5%) for the family annual income above $50,000.  This will (a) provide additional discretionary spending funds in the hands of lower income groups, (b) not “punish the success” of higher income groups, and (c) cool off rob-Peter-pay-Paul fever.  Some reliable studies in the past have indicated that a flat rate 20% tax without loop holes would generate significantly more revenue.
5. If strength of a nation lies in its economic development, its greatness lies in helping the helpless.  Some part of the of the revenue (not exceeding 10%) may be set aside for humanitarian causes and certain entitlement programs may be financed and limited by this source.

Increase in tax rate for higher income levels cannot result in a significant increase in revenue but will certainly fuel the divisive forces among varying income levels and discourage the most needed capital intensive investments to create jobs.

To avoid conditions like in Greece, no sudden or significant reduction in entitlement programs may be made; 3% to 4% reduction per year may be considered.

Last of all and most of all, to reestablish the leaders’ connectivity with the citizens, it is strongly recommended that all congress members and the President take a 50% cut in salary and perks and pledge to take no raises until the budget deficit is totally eliminated.