Fiscal Cliff 2012, Part 2
First of all, the term fiscal cliff is deceiving. The fact is that we already fell off the fiscal cliff about 10 years ago when Bush's tax cuts which overwhelmingly favored the rich took full effect, the surplus turned into a record debt, and the economy and country tanked. By letting the Bush tax cuts expire, we are returning to the Clinton tax rates that produced the strongest economy in history. That is, we are getting out of the bottom of the abyss and heading back up to the top.
President Obama is doing the right thing by holding his ground on allowing the tax rates for the rich revert to the Clinton era rates. John Boehner is still holding back because the Republicans don't want the rich to pay their fair share of taxes.
If no agreement is made by December 31, then let it be. If all Americans contribute some more tax revenue, we'll reduce the deficit at a faster rate. Then the Democrats can propose tax cuts for the middle class, and if the Republicans block it because the rich are not receiving tax cuts and loopholes, then it will make great ammunition for the Democrats in the elections. It worked very well in 2012 and it will continue to work well.
It would be financially wise for John Boehner and the GOP to accept Obama's tax proposal and work out some areas of compromise. While Obama's tax proposal closes most tax loopholes for the rich, there are two areas the rich will benefit from Obama's proposal: dividend tax and inheritance tax.
Currently, the dividend tax rate is 15% and the inheritance tax rate is 35% with the first $5 million tax free. If Obama's proposal is passed, the top two tax brackets will be taxed 20% on dividends and the inheritance tax rate is 45% with the first $3.5 million tax free. If no agreement is made, the top two tax brackets will be taxed at their income rates on dividends (36% or 39.6%) and the inheritance tax rate is 55% with only the first $1 million tax free.
However, John Boehner and the GOP have a bigger agenda than to save a few million dollars. They are making a bluff that they have power and courage to stand up against the President. But no one is buying their bluff, as polls show the public strongly blame the Republicans for the disagreement and strongly support Obama and the Democrats in the fiscal cliff game.