More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
An unresolved crisis, long in the making, in which everyone acknowledges that failure to find a resolution means we’re going over a “fiscal cliff,” would seem to present a textbook definition of a leadership challenge.
For that reason, AdvisorOne spoke with Professor Ronald Heifetz (left), the author of widely cited texts on leadership and founder of the Center for Public Leadership at Harvard’s Kennedy School of Government.
With just weeks left in the year before heading over that fiscal cliff, President Obama convened talks on Friday with Republican leaders in Congress with the aim of resolving the chronic shortfalls that have left trillion-dollar budget deficits for each of the last four years.
The Congressional Budget Office, among others, projects the U.S. will fall into recession if tax hikes and austerity spending cuts set to take effect on Jan. 1 impact the economy at the same time.
AdvisorOne has asked Heifetz what it will take for leaders of the two parties to overcome this challenge. A key insight of the Harvard professor’s past writings on leadership, which he references in our interview, is the distinction he makes between “technical” leadership and “adaptive” leadership.
When the problem is merely technical, a leader can simply go to his advisors or technical experts to fix the problem. The fiscal cliff, however, is a problem that technical experts at the Office of Management and Budget cannot fix. Rather, it is a political impasse in which we are the problem, and adaptive leadership is needed to help Americans understand why we must make changes and how we might do so. Heifetz comments:
AdvisorOne: What is the nature of the problem?
Heifetz: The fiscal cliff is a bundle of challenges – it’s not one challenge – some of which are technical and amenable to problem solving, but some of which are adaptive and require rethinking of strategic priorities, modes of operating, structural design or cultural norms.
What makes an adaptive challenge so tough are the losses that are required to be sustained in order to develop a new capacity. Sifting through what … to preserve and what to discard is a very painful process for people.
The fiscal cliff represents the losses demanded by living up to the fundamental household economic logic that ultimately you have to pay for what you buy. Democratic governments around the world commonly get themsleves into this trouble because it’s hard to face citizens with the need to pay for what they want. Politicians get themselves elected based on a promise of services for less than what they cost, or rather to distribute the cost in ways that make it more politically feasible but ultimately not wise from a budgetary point of view.
AdvisorOne: Is the problem solvable?
Heifetz: Bill Clinton (right) proved that one could face a tax increase and at the same time slash the government (through their reinventing government programs). Al Gore cut 250,000 jobs from government, and I think that restored a sense of confidence that the government could get its house under control.
Ross Perot got nearly 20% of the popular vote in 1992 because he said he could fix the deficit. Republicans tend to cut taxes but spend a lot of money on the military. The strategy has been to balloon the deficit, then put pressure on the budget to further slash government spending. The problem right now is there is no easy way to cut government spending.
Half of the fiscal cliff is figuring out how to cut government spending amidst recession -- facing the trade off in spending cuts and the losses that tax increases require in populations of people that are resistant to tax increases.
AdvisorOne: How do leaders of both parties make the case for change?
Heifetz: The impasse is not in Washington, the impasse is in the periphery, in the public. [Politicians] have to discover the negotiating space that allows each of them to go back and persuade their home constituencies that the amount of stretching they did [to reach a compromise] was still consummate with the core values they uphold.
With any constituency there’s a range of persuadability which defines how much each legislator can negotiate. How far can I stretch my people when I go home and have to inform them of the bad news that I had to compromise? It’s the selling of the compromise back home that will determine the negotiating options. What you will see now in the next month is a bona fide effort to mobilize the periphery to affect the option space defined by each other’s constituencies.
AdvisorOne: Will the two parties be able to reach a compromise, and whose preferences would such a compromise more likely mirror?
Heifetz: I think the odds are they’ll cut a deal because the stakes are too high not to. Right now, the way this negotiation is structured, the president has a stronger hand and the Republicans will have to make a significant adjustment.
The president has the upper hand because the president can allow the tax cuts to expire, and then can introduce in January new legislation to introduce tax cuts for the middle class. It would be pretty hard for Republicans not to allow these tax cuts.
That gives Obama a lot of leverage. He can afford to go over half that cliff. He can reinstate tax cuts for the constituencies that he wants to.
AdvisorOne: How do U.S. leaders, Republicans particularly, sell a deal back home?
Heifetz: I’d say prepare now the ground work so that when they have to go back to the public and explain why they’re having to make a U-turn on their agenda, they’ve begun to shape the narrative so their constituencies won’t kill them when they come back for the next election.
Democrats have to find a way to give the Republicans enough coverage as they make a U-turn; Republicans cannot look too treasonous to their own constituency.
AdvisorOne: How does the president show leadership in all of this?
Heifetz: It behooves him to be extremely clear in his narrative that America needs to get its house in order, which is a value that the Republicans have been espousing for a very long time and a value that got Ross Perot 20% of the vote in 1992.
I think that leadership then will require the development of a narrative by the president [to the effect that] it’s going to take a decade to get the American house in order. It means a variety of things to bring the budget back to surplus; it means a variety of things to paying off the debt; it means a variety of things to reforming the tax code… The president is in a unique position of being able to show how each component constituency has responsibility for their piece of the puzzle and how each piece will strengthen the foundation of American competitiveness for the next decades.
Check out other stories about the Fiscal Cliff at AdvisorOne, including: