June 27, 2012
Quite possibly never in our nation’s history have Washington politicians been more fundamentally divided about the future direction of spending and taxation decisions. Sometimes, it would seem, political gridlock can be a desirable outcome, since Congress seems almost devilishly capable of wreaking havoc with our nation’s economy, given the sometimes short-sighted fiscal policy actions enacted. At the present time, however, the political gridlock/opportunism/cowardice (pick your favorite descriptive term) that infects lawmakers is particularly destructive given the monumental issues that must be addressed over the next 13 months.
Of most immediate concern to individual Americans — and to the business community that needs some clarity of direction as they attempt to plan for 2012 operations — are a few major tax/spending decisions. The two getting the most attention are the Social Security tax rate that will apply in 2012 and any extensions in unemployment compensation benefits that may occur.
In the first instance, people who pay into the Social Security System in 2011 are getting a 2 percentage point reduction in the typical tax rate, down from 6.2 to 4.2 percentage points. Earlier this fall the Obama administration, as part of its “deficit reduction” (not “stimulus”) effort indicated a desire to give an even bigger break in 2012, dropping the tax rate for both people and businesses to 3.1 percentage points to put more after-tax income into everyone’s pockets. Sadly, the whole issue was supposedly going to be addressed by the Congressional super committee, which was charged with finding a minimum of $1.2 trillion is deficit/debt reduction over the next 10 years.
Given that the evenly divided Democrat/Republican super committee admitted defeat early last week, they failed to address the Social Security issue. As a result, within a few short weeks, it is possible that the Social Security tax rate could rise to its normal 6.2 percent. Then again, it could remain stable at 4.2 percent. Or it could fall to 3.1 percent, and extend to the business community and what they owe Uncle Sam.
Now ask yourself, if you were a businessperson trying to plan for next year’s activities — including hiring decisions — would you take a chance that one of these three outcomes is most probable, or would you simply defer any risky decisions (including potential new hires) given the uncertainty created by Congressional dithering?
And the issues to be addressed by the end of 2011 do not end there, with major decisions required about unemployed workers’ continued access to extended unemployment insurance benefits, the next “fix” associated with the Alternative Minimum Tax system (which might negatively impact 15-plus million Americans in term of 2012 tax obligations), the next extension of the “doctor fix” needed to keep reimbursements to primary care physicians who accept Medicare patients from falling nearly 30 percent, and so on and so forth. Monstrously important legislation that needs to be addressed by a Congress that seems hopelessly deadlocked.
And by the end of 2012 another set of expiring issues must be addressed, with the final disposition of the Bush tax rate reductions being the most significant. And mind you, this is not just about the tax rate paid by the wealthiest Americans, but for all families at all income levels subject to federal income taxes.
And don’t forget to throw into this unholy mix of unresolved issues the Supreme Court ruling that will address the constitutionality of ObamaCare and all of its associated mandates.
And finally, as if to demonstrate just how politically toxic decision making has apparently become, the Obama administration has put off a major decision regarding the Keystone XL pipeline which is (was?) supposed to transport Canadian oil sands from Alberta to the Gulf Coast of the U.S. so as to enhance America’s energy independence. Rather than giving a thumbs up to the project- and thereby angering environmentalists — or giving it a thumbs down — and alienating the energy industry and some union officials given the jobs that would likely be created — the president decided to “further evaluate” the issue and put off a decision until 2013 which, no doubt coincidentally, just happens to be after the next presidential election. In the meantime, the Canadians have indicated they are looking for alternative markets, including long-term contracts with the Chinese government. If so, there goes some of America’s energy independence.
Given such crass political calculations, our dysfunctional government may be insuring Americans, at best, another year of economic drift and the stagnate labor market such indecision produces.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.