- Thursday, December 13, 2012

We all know the clock is ticking on the “fiscal cliff.” In a few weeks, tax increases of more than $500 billion will take effect alongside the first of $1.2 trillion in automatic spending cuts unless President Obama and congressional leaders are able to strike a compromise during the lame-duck session.

Recent economic data also point to a worrying first quarter if Congress fails to lift the uncertainty caused by the cliff. The American public may have voted for a status quo in the organization of Washington, but they did not vote for a status-quo economy.

The blunt truth is that while many have been critical of Congress’ propensity to “kick the can,” we simply no longer have time to wait for a long-term deal. Instead, Congress must use the lame-duck session to put in place an extension of the current individual tax rates in order to buy time for a more comprehensive tax reform package in 2013. With an extension secured, Congress and the administration could turn to healing the immediate economic ills.

First, uncertainty in the private sector over taxes and government policy clearly is having an impact on business’ ability to invest in the United States. Business investment is lagging — bad news for growth next year. Long-term high unemployment coupled with the acute need to rebuild in New York and New Jersey after Hurricane Sandy create a strong case for the extension of the current 50 percent business-expensing provision, which will expire Dec. 31. Congress and the president also could increase the rate to 100 percent, as they did successfully in 2010. Such a provision would encourage the private sector to invest in earnest in 2013 and provide a much-needed economic boost.

On the individual side, in addition to extending the current personal income tax rates until tax reform can be achieved in 2013, Congress must enact another “patch” to the alternative minimum tax. Without such a patch, nearly 27 million households may be hit with this tax for the first time, with many paying an additional $3,700 in the current tax year. Come April, nearly 1 in 5 U.S. households could end up with a hefty tax bill that they didn’t expect. They will be shocked, and the political fallout will be devastating. This loss of discretionary income will hit the economy hard.

Finally, Congress must work with the president to protect America’s seniors. Without legislation in the lame-duck session, the current tax rate on dividend income is set to rise from 15 percent to more than 40 percent. This would be a direct hit to America’s seniors, who rely on dividend income to supplement retirement plans and pensions. In fact, a recent Ernst & Young study found that seniors and those nearing retirement held 63 percent of the 25.4 million tax returns with dividend income. A tax increase of this magnitude could jeopardize the safety nets of many of America’s most vulnerable. The capital gains exaction also will rise sharply, thereby damaging both risk-taking and capital creation, which are critical for future growth.

With the shadow of electoral politics no longer looming over Washington, congressional leaders and Mr. Obama must dispense with the campaign rhetoric and put forth a real solution to the fiscal cliff. The electorate may have sent Mr. Obama back to the White House, but neither he nor congressional Republicans should claim a mandate. Instead, the mandate is on Washington to get the economy back on track and avert fiscal ruin.

Steve Forbes is chairman of Forbes Media and co-author of “Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t” (Crown Business, 2012).

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