Dysfunction Bigger Threat to U.S. Than Cliff

Just as damaging as any economic fallout from Washington’s prolonged and dysfunctional efforts to reach a budget deficit deal will be the impact to the country’s reputation among business leaders here and abroad.

Whatever compromise deal the White House and Congress cobble together at the last minute won’t remove the stain of the stubborn partisan bickering that has needlessly brought the U.S. to the edge of the fiscal cliff.

Peter Tchir, founder of TF Market Advisors in Connecticut, put it this way: “What won’t change is the fact that the world’s largest economy is about to start a year and no one knows what the tax rates will be. There are lots of other uncertainties, but for me, that is the most basic one to look at. How can a country be so inept or corrupt in its governance that we can start a year with so much uncertainty?”


The hard, scary truth is that the U.S. economy, which is responsible for about 20% of the world’s gross domestic product, is apparently governed by institutions so incompetent and driven by self-interest that they couldn’t prevent a (self-inflicted) crisis nearly two years in the making.

It’s not as if the politicians aren’t aware of the problem. “What’s been holding us back is the dysfunction here in Washington,” President Barack Obama said Sunday on NBC’s “Meet the Press.”

It wasn’t supposed to be this way. The fallout from the estimated $600 billion in tax hikes and mandated spending cuts that came to be known as the fiscal cliff was supposed to be so unthinkable that neither party would put off a deal until the last minute, when a hasty compromise would undoubtedly skip real solutions to the nation’s long-term fiscal woes.

But that’s what’s happened. With just hours to go before the deadline there isn’t enough time to address systemic problems such as tax reform.

Perhaps no aspect of the long-running fiscal cliff debacle makes this point clearer than the fact that all U.S. business owners will enter the new year uncertain about their 2013 tax status. The same goes for foreign companies that do business in the U.S., as well as all individual U.S. tax payers. Which is to say just about anyone who plans on buying or selling anything in the U.S.

Consider this seemingly bland statement released Monday by the Internal Revenue Service: “We are aware that employers have questions with respect to 2013 withholding. Since Congress is still considering changes to the tax law, we continue to closely monitor the situation. We intend to issue guidance by the end of the year on appropriate withholding for 2013.”

In other words, on the final day of 2012 U.S. businesses remain in the dark as to how much they might owe in taxes this year, fundamental information that obviously directly impacts their ability to plan ahead. With tax returns due in April, the unavoidable confusion is alarming and disruptive to say the least.

Bickering Leaves No Time for Meaningful Reform

For months, business owners have been complaining that uncertainty related to the looming fiscal cliff has prevented them from planning ahead, presumably thwarting plans for expansion and additional hiring. No single issue has been more important to Americans than job creation since unemployment soared past 10% in the wake of the financial crisis of 2008.

A recent study by the National Federation of Independent Businesses found that 61% of small business owners who want to expand and hire new employees are afraid to because of  uncertainty created in large part by their elected leaders’ inability to lead.

Yet even with nearly two years lead time, Congress and the White House have been unable to reach a compromise on a realistic mix of tax increases and budget cuts that would forge a meaningful deal and provide not only for the short-term planning of U.S. businesses but also the long-term financial stability of the U.S.

In fact, the rhetoric from the two sides has been so far apart a compromise has at times seemed impossible.

On Monday, just hours ahead of the Jan. 1 fiscal cliff deadline, the White House and Congress were still searching for a middle ground to determine whose taxes will go up in 2013 and whose will stay the same under tax breaks initiated a decade ago under President George W. Bush.

The two sides seemed to be zeroing in on raising taxes on incomes above $400,000 for single filers and $450,000 for joint filers. Not surprisingly, hardliners on both ends of the spectrum oppose those numbers. Hardline Republicans oppose any tax cuts, while hardline Democrats want taxes to go up for anyone making more than $250,000.

Issues such as sequestration, the mandated budget cuts that will dramatically scale back national defense and myriad social programs, and entitlement reform that would rein in spending on such popular programs as Medicare and Social Security, also need to be resolved.

Most economists agree that the U.S. budget deficit -- $16 trillion and rising -- will continue to grow unabated without meaningful entitlement reform. But repeated last-minute political compromises that save face but put off hard decisions have prevented much needed changes to those costly programs, and that’s not likely to change.

Next up: another battle over the U.S. debt limit.