First, Do No Harm

Regardless of the outcome of the so-called fiscal cliff negotiations, tax policy in our country will be forever changed. Whether done first as a "patch" and then as part of a permanent deal, the most likely outcome (at best) is that the tax rates imposed by George W. Bush and a bare majority of legislators in 2001 will become permanent for all income up to $200,000 for single people and $250,000 for married couples. At worst, those thresholds will be raised to $400,000 or more - protecting at least 98%, and possibly closer to 99% of all income earned by Americans from going up. 

The implications of these changes have not been discussed much by the media, who, as is their wont, are far more interested in reporting this story like some breathless Jerry Bruckheimer movie where we edge ever closer to financial peril that is manufactured to scare the populace. Nevertheless, locking in these tax rates will deprive the Treasury of at least $3 trillion in revenue over the next 10 years, an enormous amount of money that will inevitably result in a smaller government where key investments will simply never be made because the money is not there to do it. For Republicans who claim to carry the flag of fiscal prudence, permanently extending the "Bush tax cuts" is incredibly hypocritical and for Democrats, it is the final capitulation in the tax cut war - a tacit acknowledgment that there is a correlation between tax rates and economic growth (never mind that economic theory does not support it). 

In exchange for permanently locking in these tax rates, the President will ultimately win some concessions - indeed, he may get some before the end of the year to extend benefits to the long-term unemployed, or another year's worth of the payroll tax cut; and soon, he may get some modest infrastructure investment spending (but far less than experts think our crumbling bridges, roads and rails need) or other stimulus from a party that purports to care deeply about employment but has done nothing to manifest that interest, and that will all be well and good except those things will be temporary and fought over whenever they expire if the President wants them extended. Meanwhile, those revenue depriving tax cuts will continue, in perpetuity, even as the cost of government goes up. Having created a floor below which no one will go, raising taxes at an income level under whatever is agreed to, $400,000, $500,000, or even $250,000, will simply never happen- slowly, inexorably, squeezing government's ability to do much besides funding our national defense and social safety net.  

Just as distressing is the fact that this form of economic hostage taking, which began in 2010 when the Bush tax cuts were initially supposed to expire and occurred again about six months later when Republicans put the full faith and credit of the U.S. government in peril by refusing to raise the debt ceiling, shows no sign of stopping. If anything, Republicans are already hinting they will pull the same stunt in less than 60 days when we again hit our borrowing limit. Not only is policy making at the point of a gun a bad idea, but this type of slipshod effort impacts everyone from government workers (no raises for 3 years) to government contractors (who cannot plan ahead) and the millions who rely on services for everything from health care to housing. It also stops our leaders from working on other issues of the day, be they appointments to the President's cabinet or gun control legislation. Make no mistake, this obstruction is intentional, with the simple goal of running out the clock on Obama and kindling the Republican hope of regaining the White House in 2016. 

So what should be done? Simple: Nothing. Let the tax cuts expire, let the sequestration cuts kick in and then, when the new Congress convenes, unveil a thoughtful, comprehensive plan to address these issues. Bullies only change their behavior when you fight back (a theme I touched on back in January: http://scarylawyerguy.blogspot.com/2012/01/mr-brady-fights-back.html) and Obama's almost pathological desire to find common ground has yielded little. This means calling the Repubicans' bluff on the debt ceiling and refusing to offer cuts to Social Security when other, more obvious options for extending its solvency (lifting or eliminating the cap on income subject to FICA, for example) exist or raising the Medicare eligibility age (which yields little in savings). 

While some short term pain will no doubt occur, it will be far better to negotiate with a clean slate, where everything is "on the table" and no artificial deadline exists to solve the problem. Moreover, Obama has two high profile opportunities to pitch his ideas to the American people - his Inaugural address and his State of the Union speech which he should then follow with a full court press of travel, public events and interviews to amplify his message, mobilize the enormous base of support that just re-elected him and leverage his new friends on Wall Street, who realize that Republican nihilism is bad for the bottom line. If the President is going to stake his second term on anything, this should be it, because the structure and framework of this deal will not only impact 2013, or the rest of his term in office, but the future of our country.

Follow me on Twitter: @scarylawyerguy