State majority said no to ‘fiscal cliff’ bill

When the American Taxpayer Relief Act of 2012, popularly referred as the “Fiscal Cliff Bill,” was passed Jan. 1, priorities within the Indiana House of Representatives, based on the voting trends of the delegates, came to light.

The term “fiscal cliff” refers to a series of laws, including the 2010 Tax Relief Act, which were set to expire at the end of 2012. The term was officially dubbed by Ben Bernanke, chairman of the Federal Reserve Bank.

The bill is said to have averted the fiscal cliff, but there are still pending economic issues on the horizon.

“This is an artificial creation, it’s Congress pushing away decisions and creating artificial deadlines,” said Ajay Mehrotra, IU professor of law and history. “It’s not like there is some superpower that said you had to make this decision, it’s a politically created constraint.”

It wasn’t just a deadline, though. There were pressures facing Congress and the American economy regarding both taxes and spending.

“It was this notion that we were faced at the end of last calendar year by two simultaneous pressures,” Mehrotra said. 

Mehrotra said on one side of things, there was the expiration of the Bush tax cuts, which were set to expire at the end of 2012.

In regard to the spending cuts, Congress assembled a committee to address the debt ceiling, which essentially helped create the fiscal cliff on the spending side. By having this deadline, automatic spending cuts would activate in the event the debt ceiling problem was resolved, Mehrotra said.

“It was dubbed a ‘fiscal cliff’ because of these two provisions, one on the tax side and one on the spending side, and we were going to hit the brakes on the economy at the same point, and that would drive the economy back into a recession,” said Bradley Heim, an associate professor in the School of Public and Environmental Affairs.
 
While the term “fiscal cliff” may seem daunting, the American economy has faced similar situations in the past.

“If you look at American economic history, you see that a lot of our potential recessions occurred because of these two same kinds of forces—taxes going up, and spending going down,” Mehrotra said.

Mehrotra said by taking a look at the Recession of 1893, or even at 1929 with the Great Depression, we can see similar kinds of pressures.

It is commonly reported that the bill avoided the supposed “fiscal cliff.” but officials say long-term issues have yet to be addressed.

Lee Hamilton, director of the Center on Congress at IU, said the positive aspects include avoiding a recession. It’s a minor step toward a better road and provides a slight reduction in income inequality, making the tax code somewhat more progressive, he said.

The bill accounted for possible tax woes, but decisions regarding spending have been deferred. It’s a temporary and partial solution because it has only dealt with one side of the issue, Mehrotra said.

Hamilton said the bill is packed with tax breaks and no spending cuts and shows people how improvised the government can be. However, he said it does not address long-term problems.

“There is still the looming debt ceiling problem, and the budget problem, not to mention the really big problem looming 20 to 30 years from now, which is this fiscal catastrophe of spending, outstripping revenue,” Mehrotra said. “As the demographic shifts continue to occur, and healthcare costs continue to rise, that’s the real fiscal problem, and that’s 20 years out and we haven’t even dealt with that yet.”

Heim said within the next three months, there are pressing issues with spending cuts, the debt ceiling limit, and the budget needing to be set before March 27.

Hamilton said the agreement lacks any sort of real effort to revive economic growth, and is simply prolonging the issue.

“We just need to get our fiscal house in order, it means scaling back entitlements, raising enough taxes that will give us the kind of government we are demanding, and we got to develop a tax and fiscal system that will promote economic growth, because economic growth is how we’re eventually going to fix this problem,” Hamilton said.