The Necessary Pain of the Fiscal Cliff

 | Nov 19, 2012 | 12:00 PM EST
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This commentary originally appeared Nov. 18 on Real Money Pro -- Click here to learn about this dynamic market information service for active traders. 

As we in the U.S. stand at the edge of the fiscal cliff and stare into the abyss, I ask myself: Why does it exist? The pain that will be created by a series of tax hikes and draconian spending cuts will undoubtedly push the U.S. into a recession. Why would anyone create such a doomsday scenario?

Well, pain can act as a strong motivator. A person with a toothache may avoid a visit to the dentist, but eventually the pain of not dealing with reality becomes too great, and off to the dentist they go. The pain is there for a reason; it is a call to action.

The fiscal cliff was put in place in order to create change by forcing us Americans to face some unpleasant truths. The basic underlying reality is that one cannot live beyond one's means indefinitely. Even if a deal can be reached and the fiscal cliff is averted, some of the planned tax increases and spending cuts are likely to remain in place. If we don't address the root of the problem, we'll find ourselves in a similar position in the future.

As always, crisis leads to opportunity. This moment in time is our opportunity to effect positive changes that will prevent the U.S. from finding itself on the edge of the abyss in the future.  

For example, higher taxes on the wealthy are a given. That's a good thing, but those rates mean little without the elimination of tax loopholes. It is the effective tax rate that needs to be targeted, rather than the nominal tax rate. Nominal rates bear little resemblance to reality, particularly among the very wealthy. We need to drastically simplify the tax code in order to eliminate those loopholes, and synchronize the two. Now is the time to do it.

The group Patriotic Millionaires for Fiscal Strength has a motto: "Tax us, we can take it." That exemplifies the attitude needed to overcome our obstacles. As someone who has been extremely fortunate in business, I agree with this sentiment. However, as someone who grew up in the middle class row houses of inner-city Philadelphia, I also value hard work and responsibility.

The U.S. now runs annual deficits of more than $1 trillion as a matter of course. That is irresponsible and unsustainable, and we can't bridge that gap simply by soaking the rich. Instead of parroting the rhetoric of blame, let's admit that we're all a part of the problem -- and that, therefore, we must all be part of the solution.

That means higher taxes not just for the wealthy, but for all. Everyone needs to have some "skin in the game." Instead of divisiveness, we need to promote a "we're all in this together" attitude. It's the right thing to do. Keep rates higher across the board until we get our financial house in order.

Regarding spending cuts, the fiscal cliff creates an opportunity to deal with areas of spending that have grown wildly out of control. For example, I believe the U.S. should have a strong military, but what does that mean in 2012 and beyond?

In illustration, the U.S. currently has more than 53,000 troops stationed in Germany. Is that really necessary? Is it possible we could get by with, say, 30,000? In a world of increasingly mechanized, asymmetrical warfare, does having troops stationed in more than 150 countries help you to feel safe at night?

There are many other areas that can and should be cut, and this is but one example.  My point is, we're no longer living in the 20th century. We have more than 1.4 million personnel on active duty, enough to create the seventh-most-populous city in the U.S. Once upon a time, a massive army was a sign of military strength, but the types of conflicts we are likely to experience in the 21st century have changed the focus to small, highly specialized teams.

I have a great deal of respect for our troops, and it's not my intention to single out the military -- there are many additional areas where we can save money. For example, the U.S. Postal Service lost nearly $16 billion last year. When you find yourself standing in a long line at the post office this holiday season, consider that nearly every task performed there could be automated.

To those who will say that these ideas will result in lost jobs, consider this: We can't afford the luxury of living in the past. We've spent ourselves into a tremendous hole, and we have to stop pretending that we can get away with it indefinitely. The truth is the truth, regardless of whether we have the courage to face it.

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