Clarifying the Fiscal Cliff and Tax Policy

The article I'm pulling pieces from can be found at www.oftwominds.com and helps us see into the reason behind and reality of the coming policy changes.

These are some points I would like to highlight (my words not his unless quoted):

1. Government spending while not inherently ineffective and inefficient, is made so by the reality of politics.

If the government spent the taxes on investments that yielded a higher return than private investments, higher taxes would not devastate the economy. But the problem is that there are no feedbacks on government spending that favor efficiency or high yields.

2. Do to lower overall income (disparity aside) government growth cannot continue. Given the historic trend of under 20% tax to GDP ratio, making the tax code more progressive probably won't address this.

Real income has declined by 8%-9%. The pie is smaller, period.

3. The welfare state is part of an unspoken agreement between the wealthy, upper class, middle class, and bottom 50% that rely on government transfers.

The Grand Bargain was this: we at the top will pay significant taxes as long as we get to control the levers of financial and political power. We in the top 19% will pay much of the taxes as long as we and our children can continue to live well and accumulate wealth. We in the "middle class" will continue to work hard as long as we have hope of bettering our lifestyle and the lives of our children. We in the bottom 50% and retirees agree not to threaten the top .5%'s power and the wealth of the top 19% as long as we can get by on our government transfers.

4. Earned income tax penalizes the productive workers more than the wealthy. While many focus on CEO pay, a great deal of the income of the top tier is made through dividends and capital gains. Raising tax rates on the wealthy while ignoring these unearned sources of income will not fix the problem.

By heavily taxing earned income, the system extracts the highest taxes from the most productive citizens, leaving the less-productive with essentially no income taxes and the super-wealthy with the huge tax break offered to capital gains and other unearned income.

I believe the article brings a good deal of clarity to an issue dominated by ideology. What pieces of the original article (or my comments) would you agree/disagree with and why?