Tax Break

John Fisher, international tax consultant

Archive for the tag “Fiscal Cliff”

Beating about the Bush tax cuts

Keep it simple

Keep it simple

I believe it was  John the Baptist  who coined the  phrase, “In the beginning  was the Word”. Whatever your creed, words have definitely had a pretty serious effect on the world from time immemorial. For me, the mere mention of the word “War”, in all its mono-syllabic, animal-like simplicity, is enough to strike fear into my cowardly heart. Some years ago, speaking at a conference about Investment in France –  in the presence of the French Ambassador and other dignitaries – I put paid to any ambitions I may have fostered to advise French nationals by telling an apocryphal Churchill story. Asked why he considered his 1940 speech, “We will fight them on the beaches….”   his most effective of the war, Churchill  is reputed to have explained that it was because, with one exception, his main vocabulary had been ancient Anglo-Saxon –  short and bold. That one exception – from Norman French – was “Surrender” . Nobody (and I mean,  n-o-b-o-d-y)  spoke to me at lunch.

It is interesting that two words uttered in an obscure speech nearly a year ago by an individual not normally known for his oratorical prowess,  managed to grip the entire American nation  in fear. While Joe  Public calmly went about his daily business ignoring the real nuclear threats coming out of Iran and North Korea, any mention of Ben Bernanke’s “Fiscal Cliff” would bring beads of sweat to his brow as he  imagined watching helplessly while his wife, children, home and SUV tipped over the edge of a mountain into the abyss.

As became apparent to all doubters last week, there never really was a Fiscal Cliff. The witching hour came and went on December 31 and it was only a full day later that the House of Representatives “pulled the country back from the brink” (spare me). It was a full day after THAT that President Obama, back at his “I’m as cool as a cucumber” vacation pad in Hawaii,  had it signed  into law by “autopen” with retroactive effect from the beginning of the year.  But we Old World people should remember that this is the land of Hanna Barbera where cartoon animals (an elephant and a donkey?) can go careering, horns locked, off a precipice and belatedly realizing their predicament, raise dust in the air as they do panic bicycle-riding motions with their feet regaining dry land. Ever the miserable rationalist, I prefer to think of  the blinded Duke of Gloucester in King Lear being deceived by his son into attempting suicide by jumping over a harmless bump, rather than the White Cliffs of Dover as he intended.

With the Fiscal Cliff  receding from view, we are being told that  all that happened was that “the can was kicked down the road”. Holdonasecond! Where did the  road come from? For the last year America has been hurtling towards a precipice across virgin green fields and rock formations, with the nation ending up dangling over the edge. Now, all of a sudden, there is a road. On the edge of a cliff?  No – there has simply been one of those sudden scene changes that typify Hollywood action movies and Washington speechwriters.

An open tin can with a dangerously serrated edge is now bumping down the stairs of the Capitol heading for the Mall, where it will roll happily along until it veers right two months from now at the Washington Monument and comes to rest on the White House lawn.  Then, with Washington required to negotiate deeply wounding spending cuts, the President and Congress will have to come up with something new and scary. How about  “The Great Mowing”? Frankly, they are more likely to go for something less consistent but more direct. “Washington Chainsaw Massacre”  is the sort of thing that should really give Ol’ Joe Public the willies.

If the branches of government still can’t find their common trunk, “the can will be kicked back  into the long grass” eventually reaching the end of the Mall at the foot of the Lincoln Memorial, where President, Senators and Representatives will be reminded that “Government is for the people”. If the greatest political speech in American history doesn’t do the trick, nothing will.

Tea Party Caucus

Tea Party Caucus

Meanwhile, the US is floating irreversibly up towards the “Debt Ceiling” – a rather gentle phrase that conjures up Nash terrace houses with high ceilings, Chippendale furniture and heavy scarlet curtains (not to mention scenes from Mary Poppins and Harry Potter). In reality, if the Tea Party Republicans lose all radio contact with Mission Control and vote not to increase the ceiling, that  really could plunge the entire planet into crisis overnight as the US starts to default on its liabilities.

On January 2, the Fiscal Cliff behind him and free to pursue the Republicans on the Debt Ceiling, President Obama released the safety catch on his mouth and turned it to semi-automatic: “We can’t not pay bills that we’ve already incurred”. Apart from being a candidate for unforgiveably worst line of 2013, it was a brilliantly awkward double negative that indiscriminately strafed  House Republicans. Unlike his predecessor, Obama normally manages to  place one word in front of another, and I am tempted to believe the sentence  construction was intentional.

Metaphor, idiom and daft constructs aside, it is  clear that both sides have got it wrong in this debate. Republican reluctance to raise more tax revenue in an acute deficit situation is barmy while Democrat insistence on raising tax rates only on the higher echelons (even before they agreed to a raised $400k threshold from the original $250k) will hardly scrape the protective coating off the deficit.

NASCAR got a tax break - increased depreciation. Understandable really

NASCAR got a tax break – increased depreciation. Understandable really

Meanwhile, there can be no way out of the current dire situation until President Obama decides which items of spending are really important to him and then takes an industrial lawn mower (or chainsaw) to the rest. The Republicans could well be right that – if they have no choice but to agree to higher taxation – rather than raise tax rates, Congress should do away with the countless deductions that render the headline tax rate irrelevant. Even the Act passed this week quietly included tax breaks thanks to all sorts of weird and wonderful lobbies. Essentially, the Internal Revenue Code needs to be thrown over a cliff.

The only serious question remaining is that of timing. Americans, having watched aghast at the austerity-induced implosion of the Euro zone, know that they need to balance the situation carefully. Paul Krugman, guru of the Neo-Keynesians, misses no opportunity to reject any quick fixes. But that does not imply  that there should not be a medium to long-term plan. Obama needs to show leadership – and leadership is not just fancy lines on the teleprompter. The recent election was totally negative as was the spat over the Fiscal Cliff. Time to think positive Mr Obama. “Yes, we can’t keep kicking the can down the road”.

The Greatest Show on Earth?

Can you still name this guy?

Laurence Spiegel was my first political hero. Never heard of him? Don’t worry – nor had Google the last time I checked. The one and only time I worked on the campaign team for a British General Election it was for Laurence Spiegel . That was an important election for two reasons: despite polls showing a clear advantage to the incumbent Labour Government, the Tories won an overall majority;  and the voting age was lowered from 21 to 18 on the grounds that if you were old enough to die for your country, you were old enough to choose the idiots that got you killed. None of this affected me. Laurence Spiegel was the no-hope third-party Liberal  candidate for Hendon South who I don’t think even bothered taking the day off work  (I didn’t see him at Campaign HQ)  and, in 1970, I wasn’t old enough to gain admittance to a cinema to see a war film let alone serve my Queen and country.

I have been following political campaigns ever since and the latest American circus was no exception. But it was too drawn out. There is a bridge in Scotland, the Forth, that is so long that, it is said, when they finish painting it they start again at the other end. In America, it used to be that campaigning for the Presidency started 4 years before polling day ie the day after the previous one.  Watching New Jersey Republican Governor Chris Christie cozying up to Barack Obama in the aftermath of Storm Sandy a week before the election, I could not help feeling that, in a piece of brilliantly cynical political manoeuvering, the world might well be  looking at Obama’s successor in the White House.

Election night was a major disappointment. That statement is clearly true for the 48% of  voters who picked Romney and did not, like so many of their countryment, exercise their constitutional right to stay  home welded to a sofa watching a ball game while trying to break records for calorie consumption. It was also a disappointment for me – and I, disenfranchised by accident of birth, actually wanted Obama to win (or, to be more precise, wanted the Republicans to lose). With the advantage of being 7 hours ahead of New York (some would say 7 light years), I was up with the lark to catch the phut of election night. What a yawn.

Within seconds of  Obama hitting 270 electoral college votes and hence guaranteeing a renewal of his Washington lease, what were the pundits talking about? Was it: what will Obama  do about the future of world peace ?  Was it: what will he do to make America  great again?  Was it: what is the future for social welfare ?  No, sir.  In fact, they were talking about tax. TAX! A subject normally reserved for discussion behind closed doors between consenting adults, was the first thing on the lips of the pros. And “reforming our tax code” even made it into Obama’s victory speech in Chicago (which sounded more like the candidate had beaten himself than Mitt Romney).

Fiscal Cliff? Who’s that?

If you have never heard of the Fiscal Cliff, I suggest you climb right back into that little boat in which you have been drifting without food or water for the last 9 months and enjoy the night sky. As everyone  knows, the Fiscal Cliff was Ben Bernanke’s term for the higher taxes and lower government spending that will kick in next January 1st if somebody does not kick Congress’s ass (“bottom” in the Queen’s English) first.

The Fiscal Cliff is, in fact, the unfortunate coincidence of a number of  economic legislative events coming together to cause an unmitigated disaster: the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers); the end of certain tax breaks for businesses; shifts in the alternative minimum tax;, the end of the Bush tax cuts;  and the beginning of taxes related to President Obama’s health care law. At the same time,  spending cuts previously agreed upon will begin to go into effect. If nothing is done, some experts are predicting a cataclysmic effect on GDP and unemployment.

The question you HAVE to ask yourself is “How did the world’s leading nation get into this mess in the first place?” You couldn’t make it up.

The Bush tax cuts (the famous bits are the lower tax rates on dividends and capital gains) could not be pushed through the front door of Congress back in 2001 and 2003 so they used something called the reconciliation process that allowed them to be imposed temporarily until the end of 2010. By 2010 the House of Representatives was resembling the battlefield at Gettysburg, and Congress extended them for 2 years. As politics go, that is kids’ stuff.

Four more years!

In the summer of 2011 the sparks were really flying. Congress needed to raise legal debt ceilings for the federal government, otherwise the US was going to default on its Sovereign Debt. The Republican controlled House of Representatives was not playing. At the eleventh hour, a compromise was reached whereby, default was avoided and  a Bipartisan Committee was established to produce a plan to reduce the deficit over 10 years by $1.2 trillion by late November. There was a  sting in the tail that either  arose from a genuine desire to get things sorted out or  the irrational hatred between the two sides of the House . The House decided that, if the Committee could not reach a conclusion, automatic, and horrendous,  cuts would start to kick in 2013. The Committee, its members too busy scratching each other’s eyes out,  didn’t make it.

All that remains for us to do now is to sit back and enjoy the fireworks coming out of the lame-duck Congress. Presumably a solution will be reached at midnight on December 31 (or, with retroactive effect, on January 1). In American politics, after a massive buildup, most things end in a Phut rather than a Bang.

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