The fiscal cliff was a shorthand term used to describe a series of changes that were set to take place on midnight on December 31, 2012 including a roll back of the “Bush tax cuts”, an end to the temporary payroll tax cuts (resulting in a 2% tax increase for workers,) and deep automatic cuts for over 1,000 government programs. In theory, a fiscal cliff bill was designed to stop the government from going over the cliff. Utah Sen. Mike Lee was one of only 8 senators who voted against the fiscal cliff bill. Meridian asked him why.
Meridian: On New Year’s Eve, the so-called fiscal cliff bill came before the Senate and you were one of only 8 Senators who voted against it. Why?
This bill represented a failure on several levels. It was a failure in what it did. It was a failure from a procedural standpoint and it was a failure from what it failed to do.
What it did was to preserve the overwhelming majority of a dysfunctional tax system. We have a tax system that has put us $16 trillion dollars in debt, has given us trillion dollar annual deficits and is really choking our economy. We have preserved the overwhelming majority of it. One could say we preserved about 98 or 99% of it. For those who had a significant change in their income tax structure, it just got worse. For everybody else, it got left intact. Preserving a dysfunctional system is bad.
On the procedural front, we were left with 6 minutes to read this bill. This is 153-page bill. They released the bill text as 1:36 a.m. on New Year’s Eve. We were called to vote at 1:42. It is physically impossible to read a 153-page bill in 6 minutes. It’s not just that it’s physically impossible, you know with a high degree of certainty when you get a bill of that importance and that length with that much intensity surrounding it, that it is laden with special interest favors, and it was. I didn’t know what they were at the time, but I knew they were in there-and that’s one of the reasons I voted no.
Finally, what it failed to do-it failed to achieve any kind of meaningful reform of our tax system. We’ve got an antiquated, outdated, volatile tax system that produces an inconsistent revenue stream. In some years like 2011, it produced about 14.5% of our GDP. It averages between 18 and 18.5% of GDP and some years you get peaks. About twelve years ago we had a peak that was over 20%, but it averages about 18%. The problem is the peaks and valleys cause us to expand government. In the peak years we end up spending everything and that resets spending at the high level, but we don’t ratchet back down the spending when we hit a valley. It’s not a good thing. What we needed was comprehensive reform and we didn’t get that. Instead we got something worse.
Meridian: When the nation is in a desperate situation, though, isn’t it time to compromise? Aren’t there times you have to bend to solve a problem?
Of course you do. Compromise is a term that gets thrown around a lot these days. It’s interesting. My office fields a lot of phone calls that deal with the word compromise. A large number of them say, “Don’t ever compromise. Don’t do that.” Another part will say “Compromise. Compromise anytime you get the chance. Compromise with a fox in a box on a train in the rain.” The calls that take either of those two perspectives perhaps miss the point, which is that compromise isn’t an end. Compromise is an inevitability in any legislative process that involves more than one person. If you are a dictator, a despot in whom all power is concentrated, then you don’t have to compromise. If you’ve got a legislative system that involves more than person, you have to compromise.
You can’t justify what happened here with this legislation by invoking the need to compromise. That’s not what happened here. Nor can you suggest that this legislation had been debated for months. It was debated in the Senate not at all. It wasn’t even debated for six minutes because no one ever read it. An essential element of true compromise is open debate that includes the opportunity to amend. We didn’t have the opportunity to amend this in any respect. We didn’t have the opportunity to present even a single amendment to this.
So to call this compromise would utterly miss the problem. This was not a compromise. This was something that was rammed through the process of the Senate in a most inartful manner.
Meridian: What do you think should happen to the tax system to make it more consistent and reliable.?
Sen. Lee: First, the tax system needs to be simpler. Our tax code, together with all its implementing regulations, occupies tens of thousands of pages of text. No one has ever read the whole thing in its entirety. No one ever will. If they did they would probably die, just like the man who ran the first marathon and died immediately after.
I sit on the Joint Economic Committee, and a few months ago we had one of the nation’s leading experts on the U.S. tax system. He has a PhD in the U.S. tax code. We asked him a question. “Do you prepare your own taxes?” The answer was as telling as it was shocking. He said, “No, I don’t, because there is no possible chance that I could be certain that I have gotten it right.” So, even somebody who has dedicated his entire professional career to the U.S. tax code doesn’t understand it, even with respect to his own tax situation.”
James Madison had a great quote in Federalist #62. He said, “It will be of little avail to the people that their laws are made by men of their own choice, if the laws be so voluminous that they cannot be read or so incoherent they cannot be understood; If they be repealed or revised before they are promulgated or undergo such incessant changes that no man who knows what the law is today can guess what it will be tomorrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?”
His words seem to reflect a concern that is very well highlighted by today’s tax code. Our laws ostensibly are written by individuals of our own choosing, but they are so voluminous that they can’t be read and so incoherent that they cannot be understood. We need a tax code that is simpler and fairer and more easily understood.
Meridian Magazine: What specifically in addition to the complexity bothers you about the debate at hand?
Sen Lee: The mere fact that is as complex as it is leads to other problems. Those who secure certain benefits under the tax code, do so, not because they are providing any good or service to humanity that warrants it, but because they are powerful, because they can afford to have an army of lobbyists working Congress and making sure their special interest is protected under the tax code.
The tax code, as I see it ,serves two basic purposes. First, it is to provide revenue for the operation of government, and second, it is to communicate accurately to the voters the true cost of government.
Our current system performs the first function quite poorly and the second function even more poorly in part because of its complexity. Most people can’t look at the tax code and say, “I can figure out what government costs. Most people can’t tell people their own effective tax rate. Most years most people don’t really know. It’s really complicated.
Meridian Magazine: Was this fiscal cliff really a crisis or was it something created by Congress?
Sen. Lee: There can be no doubt there was a looming crisis. It was, of course, a crisis of the government’s own creation. Had Congress not acted, taxes would have gone up on everyone. It is as not as if some outside force acted upon us and created this crisis. Congress itself created the crisis. Secondly, It is not as if Congress averted the crisis or all of the problems that we face relative to our tax system or relative to our economy. It is not at all clear that we averted it.
For instance, taxes are going up on almost everyone anyway. It would be a lie to say that this legislation that was passed prevented taxes from going up on all but the wealthy. Something like 80% of American tax payers are going to face a higher tax burden in 2013. That’s going to hit a lot of hard working people really, really hard. There was a crisis to be dealt with, but it was a crisis of the government’s making.
One other thing I would add to that, is that we still face an ongoing threat, one that I hope will not be obscured in the eyes of most Americans. I have started referring to the fiscal avalanche that we face in the long term. You can see the cliff. You knew when the cliff was coming. We knew at the first of the year we would be hitting the cliff unless we did something about it.
But an avalanche, unlike a cliff, is something can happen at any time once the critical, necessary elements for that disaster are in place. You don’t know when a literal avalanche is going to hit you. You know if there is enough snow up on the mountain, if that snow isn’t being held in place by something, eventually it is going to slide, and when it does, it is going to lead to destruction.
We do face a fiscal avalanche of sort in the coming years that relates to our unsustainable national debt. We are paying a little over $200 billion a year on interest on our national debt. Some time in the next few years the interest rates that we pay on that will start to increase because people will be unwilling to loan the U.S. government more money without a higher yield rate.
As that happens, very quickly we are going to discover that that annual interest payment isn’t going to be $200 billion any more. It is going to very quickly spike to the point that just a few years from now we will be paying a trillion dollars a year in interest. A trillion dollars a year in interest, leaving an $800 billion a year difference between what we are paying now and what we will be paying just a few years from now. We don’t know exactly when this will happen. We know only that it will. It could be two or three years away, or it could be eight years away, but it is somewhere within that time period.
That difference is more than what we spend on national defense. It’s about what we pay on Medicare and Medicaid combined. It’s more than what we spend on Social Security in a year. There isn’t a tax increase on the planet that could cover that. We could raise taxes, but no tax increase that I could fathom could produce that kind of revenue without simultaneously wreaking havoc on our economy and make matters worse. So, what are we going to do? You could borrow more, but then your interest rate is going to go even higher, so that you could be paying $1.5 trillion or $2 trillion which will lead to other problems.
I suppose you could print more money, but we’ve seen what happens when you do that. That is one of the most regressive forms of taxation known to man. It hurts the poor more than anyone else, and it hurts everyone. We’ve got to start dealing with this.
Meridian Magazine: Why aren’t we dealing with it?
Senator Lee: There are times when I wish I were a psychologist. I think you could make a living psycho- analyzing Congress as an institution. Having worked back there as a senator for two years, I’ve come to some conclusions about the collective psychology of the place. I wrote about it in a book I wrote called The Freedom Agenda. In that book I explained that elective officials really like to be praised. We tend to be praised when we vote to create a new program or to increase the funding for an existing program or at least keep it in place. We tend to be criticized when we choose not to do those things. The natural inclination that most members of Congress feel is to create programs and to perpetuate existing programs. They don’t like to cut. Nobody likes to be the bad guy. Politicians generally like to be optimistic. They don’t like their words to be shrouded in doom and gloom. A lot of people refuse to acknowledge the fact that this is coming because it’s too unpleasant to explain. Nobody knows for sure when and there are some people who believe that we can keep this spending and borrowing up more or less indefinitely. Some think we can keep interest rates at or near zero percent in terms of their real cost. There is a combination of those forces at work.
Meridian Magazine: In addition, however, many believe that government can and should have programs to meet a vast array of needs. It is as Lord Woodhouselee said,
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.”
Senator Lee: When we as a society start to think of government as being responsible for more than those things that the constitution empowers the government to do, then we are operating outside this 225-year-old document that protects our system of government and protects us from it.
The more we stray from that, the greater the risk that what you are describing will become a problem.
Then that problem can be compounded by the fact that our tax system fails to communicate accurately the cost of government to the people. A lot of people think they are getting government for free when in fact they are not. Even those people who think they are not paying anything in federal income taxes, for example, are not, in fact, getting government for free. They are paying for it in the form of increased prices on goods, increased prices on services, unemployment and under employment. Everyone is poorer as a result of government getting too big and too expensive, even those who are fooled by government into thinking that government is free for them.
That’s one of the messages that gets lost in all of this. We should be always focused, most intently on the most vulnerable in society You certainly don’t want those who are the most vulnerable to become the victims of government. Yet those are precisely the ones who are the victim of government expansion, even when government tells them otherwise. Even when government tells them, we are raising taxes, but only on the rich. First of all, it’s not true. We are raising taxes on everyone.
Yet even if the only taxes that were going up were those involved raising the top marginal rate from 35% to 39.6%, it still would be inaccurate to say that hurts only the rich. One of the things that happens when you raise tax rates like that is that people are less able to hire additional employees. They cut back on what they spend on a personal level or through their businesses. Those who lose their jobs as a result ot this are rarely those who are at the top end of the socio-economic spectrum. The people are going to be fired first are not the CEOs; they are usually those at the bottom end of the pay spectrum. When a small business decides to cut its payroll because of a tax hike, the people who are going to get fired first are usually not the CEOs of the COOs or the lawyers or accountants. We worry most about tax increases on the rich, not because of what they do to the rich, but because of what we do to the poor
Meridian Magazine: What can we do about all this? It seems kind of hopeless in some ways because it is complex and many don’t understand the trouble we are in. Are we victims to this madness?
Senator Lee: I hope people won’t regard themselves as hopeless, helpless victims, if we get to that point we really are in trouble, and I don’t think we are there. The government still works for the people. It is still operated by people who are elected. If people will acknowledge that to themselves and then undertake an effort to become involved, we can change things. It is a reason to make a disciplined study of government, why it exists, what is empowered to do and what it should never be empowered to do. That starts at the individual and family level through study and involvement. We will benefit when we get back to understanding the purpose of government. Our Founders understood the risks of concentrating government into the hands of the few. That’s why they set up the government they did. We’ve moved in a different direction.
They said here are the things our government will do-and it was a limited list. Most all of its powers were outlined in Article 1, Section 8 of the Constitution which you can read in about two minutes. The gist of it is that our national government will be in charge of a few basic things like national defense, declaring war, granting letters of marque and reprisal, setting up a postal system, a national bankruptcy system, protecting trademarks, copyrights and patents, managing federal public land, managing the affairs of the army and the navy and so forth, and that’s about it. We reserved everything else to the states.
The more people will read that document and read the Declaration of Independence as well, they’ll understand why it is we need to be so cautious about allowing our national government to become too big. They’ll also recognize how significantly we have strayed from the founding era of understanding of a limited purpose national government. That’s broad, abstract answer I know, but when we are in a deep mess sometimes the only thing that can rescue us is a broad, first principles kind of approach that focuses on what government is, and more importantly what it is not. That has to start at the individual and family level and move out from there as people start to think about it and talk to their friends and their neighbors. That’s how this starts.
Meridian Magazine: Do you see any evidence of people responding to this?
Senator Lee: I see it everywhere. It is all over the place. People are going back to first principles. We have reason to be discouraged, but it is one of the reasons that I am not hopeless because I see it going on throughout the state of Utah and across the country. This includes states that have recently voted to re-elect our current president and those who stand with him to other federal offices. That’s why I’m hopeful. It is still a nascent movement, but it is growing. People are saying this movement is something that has lost momentum, but they are missing the point. This is a movement that caused the House of Representatives to change hands in 2010 and we held on to those seats in the 2012 cycle. We’ll see a lot more of them in 2014 and 2016.
We lost a couple of seats in the Senate, but we lost them for reasons that had nothing to do with that message not being accepted by voters, but because we had some candidates that got dangerously off course.
Meridian Magazine: The fiscal cliff bill was in many ways a stop gap. What is the next big fight?
Senator Lee: The debt limit is the next big fight. That is going to be a big fight and it needs to be. The President has been saying that it needs not to be, and we need to turn it into what it used to be which was the legislative process equivalent of a Motherhood Appreciation Resolution, that everyone votes for because why wouldn’t you vote for it? That’s what it was in the past and that’s how we got to the point of being $16 trillion dollars in debt is that we treated it too lightly. That is not going to happen any more. That is a thing of the past.
This is going to be a hotly contested issue and it should certainly result in some kind of permanent, structural reform to the way we spend money in Washington.
I still believe America’s best days remain ahead of her. Embracing the principles of limited government is what had enabled us to become the economic and military super power that we have become.
We can become even stronger if and only if we return to our founding.