Nancy Pelosi And Obama Budget Deal To Avoid Fiscal Cliff [Op-Ed]

Commentary | Nancy Pelosi is attempting to work with Obama on a budget deal to avoid the fiscal cliff coming January when the Bush era tax cuts are set to expire. As part of that budget deal Nancy Pelosi claims that tax rate increases for the rich are necessary, specifically the tax bracket for those making more than $250,000.

“Just to close loopholes is far too little money,” Pelosi said in an interview with ABC. “If it’s going to bring in revenue, the president has been very clear that the higher-income people have to pay their fair share.”

Unfortunately, who is considered “rich” is a moving target in regards to these budget deals. House Majority Whip Kevin McCarthy (R-CA) said on Fox News today that Nancy Pelosi “keeps changing the game plan” with regards to the fiscal cliff:

“Nancy [Pelosi] said last May that it had to be a tax increase on those a million and more. So she keeps changing the game plan. That can’t be the case…Let’s sit down and find a bipartisan way that we can solve this problem, not go to a fiscal cliff while at the same time have a pro-growth agenda where we grow jobs.”

Note that Congress, both the House and Senate, is primarily responsible for the budget although Presidents can suggest a budget or help work out agreements. Unfortunately, the fiscal cliff cannot be avoided by merely focusing on partisan issues, which is what Nancy Pelosi is doing. The cuts will have to be across the board. After all, federal deficit is just a fancy way of saying that they are spending more than they take in with revenue.

The hard part is that neither party wants to be blamed by the public for reducing spending on military, medicare, and social security, which, if combined, account for approximately 75 percent of the annual federal budget.

Increasing the taxes on the rich may feel good to the majority of the US population, but it won’t resolve the federal deficit. The federal government does not have a revenue problem, it has a spending problem. As Arthur C. Brooks of the American Enterprise Institute has pointed out, “[e]ven if individuals earning more than $200,000 were taxed at a 100 percent marginal rate–and we confiscated their passports so they could not flee–the take would come to $1.27 trillion, or just 77 percent of this year’s deficit.”

Suggesting a 100 percent tax rate may sound outrageous, and could be argued to be virtual slavery, but at one point in our history that was not far off. At one time the highest tax bracket was once 91 percent. Forbes believes there is a strong negative correlation between Federal revenue and the top marginal tax bracket. Fortunately, the tax hikes under discussion are not high enough to negatively affect the economy to a great extent.

The Federal deficit may have increased greatly while Congress and the White House have been under Nancy Pelosi and Harry Reid’s Democratic control, but the Republicans have plenty of blame for the debt. The Republican Party controlled the Presidency and all of Congress from 2001 to 2006. Of course, from 1995 through 1999 the Republicans controlled both the House and Senate and underneath President Clinton they managed to get the deficit down to $17.9 billion. What happened to the party that supposedly stood for small government and passed the Budget Enforcement Act of 1997?

The Medicare drug benefit of 2003 is one example of an unfunded Medicare bill that has greatly added to the federal deficit. This bill is hypocritically still supported by Republicans while at the same time bashing the huge spending contained within Obamacare. The hypocrisy can be said to cut both ways. Democrats do not want to repeal it since it’s popular with seniors. They had plenty of opportunity to do so from 2008 to 2010 under Obama when they had a majority in both the House and Senate.

In 2001 the deficit started at $158 billion. From 2000 to 2004, Federal revenue was dropping sharply, and spending was increasing just as sharply, so the deficit peaked at $413 billion.

After that the Bush tax cuts began taking effect, Federal revenue went up, and thus by 2006 the deficit was down to $161 billion. The Democrats then took control of both the House and Senate after the 2006 elections and thus in 2007 the deficit spiked to $459 billion. After that the recession noticeably hurt revenue, which, in combination with overspending, sent the deficit to $1.4 trillion and so on.

Nancy Pelosi is probably correct in believing that the rich can spare more money to pay taxes. But keep in mind that while top personal tax rates are relatively low in the world we happen to rank near the highest when it comes to corporate tax rates.

I’m just hoping the willingness of business people to invest in to America’s future is not harmed. At the same time, if Nancy Pelosi and Obama cannot work with the Republicans the fiscal cliff may be unavoidable.