Cliff Notes

(...) wealth is not the same as income. The argument to tax the rich has really meant tax those whose current wage and salary income is high. However, let’s offer the reader a choice—who is richer—the $30 billion-plus portfolio manager or the $1 million salaried worker? The problem is that we are defining rich based on current income without any accounting for wealth. Therefore, it is no surprise that so many billionaires in terms of wealth have no problem raising taxes on the millionaires in terms of income (actually, $200,000 single and $250,000 married couple).  -- Fiscal Cliff and True Reform, Wells Fargo Securities, LLC Economic report, December 18, 2012

I have been a reader of Wells Fargo Securities reports for about 6 months now, and have found every one to have high value. After reading this report, I was no longer concerned about what might happen if we traverse the fiscal cliff (as still seems likely here on New Year's Day). The conclusion that can be drawn is that policy makers are addressing the wrong problem.

Here's a primary viewpoint of the report, which I agree with:

(...) running fiscal policy based  on  the  opinion polls of who should get taxed is not an intelligent form of policymaking. Of course a majority of the opinion favors taxing a minority. This is the worst form of taxing the man behind the tree. As indicated above, the problem is that the tax base has been narrowed too much both in terms of incomes taxed and our definition of rich. Such opinion polls represent the tyranny of the majority for a majority that is unwilling to tax themselves for the benefits they receive.

 The report goes on to emphasize that neither Simpson-Bowles, nor the baseline fiscal cliff scenario addresses the real problem, which is that the promised entitlements require 4% growth in an economy that will max out at 2 percent on into the future. Further, if the debt level does not immediately fall to 90% or less, we're not even going to get that. Simpson-Bowles took Obamacare off the table, and left Social Security and Medicare untouched. As such, it did not address the elephant in the room.

Since the congress that takes over for this one is comprised almost entirely of democrats and republicans, there isn't much we will expect in the way of useful fiscal policy. The problem begins with the two parties arguing over a fallacious pivot point...which is that we should begin confiscating income. Why is that fallacious? Income is the desired result of a growth economy. If policies seek to limit income by taxing it, there will be less growth. When there is less growth, the economic assumptions made that foretell any semblance of stability go out the window.

So, place your bets accordingly. Economic growth of 4% against the headwind of Obamacare, declining demographics, and near certain inflation vs. all that with higher taxes. Happy New Year.