Friday, December 28, 2012

The Fiscal Cliff

Much has been written about the so-called fiscal cliff, which looms large on January 31, and the inability of Congress to avoid it.  But what has not made the headlines is that this entire nonsense is a Republican creation, stemming largely from their inability or unwillingness to make permanent the temporary Bush tax cuts enacted in 2001 and 2003.  Everything else follows from that.  But why are Republicans to blame for the current crisis?

First, Republicans continue to cling to the notion that any tax increase, on anyone, at any time, is heresy.  Of course, that begs the question of why they wrote an automatic tax increase into the original Bush tax cuts, which they eagerly voted for.  Even this week, the pundit class is saying that the Republican logic now seems to be it is better to "go over the cliff," then supporting legislation in early January that they could call "tax cuts," even though tax rates would simply revert back to 2012 levels for most people.

Secondly, no one seems to be talking very much about other effects of going over the cliff, particularly the effects of expiring stimulus measures that lowered the Social Security payroll tax on working class Americans, and extending unemployment benefits.  There are also a number of tax credits that would expire, including childcare tax credits and tuition tax credits.  Republicans seem perfectly content to impose upon working class Americans a substantial tax increase, apparently because, well, I'm not sure why.  The juxtaposition of their ambivalence on the payroll tax increase against their iron-willed insistence on maintaining low marginal rates on those with incomes over $250K is baffling to this observer.  It seems the only difference is whose ox is being gored, and Republicans seem to believe it is better that the working class suffer in order to reward the so-called job creators.

Finally, this whole "fiscal cliff" moniker is ill-begotten.  For true deficit hawks, going over the cliff would result in substantially higher revenues and substantially lower government spending.  Of course, the widespread slashing of government jobs and government contracts would mean a substantial slowdown in the economy, with the threat of Japanese-style deflation and another decade of stagnation.  The "new normal" of the past five years would seem like the boom times of the 1950's in comparison.

So what is the solution?  Here are four measures to avoid the fiscal cliff and put our economy back on track:

  1. Make the current personal income tax rates permanent.  This would include the top marginal rates.
  2. Significantly tighten the definition of capital gains.  If the justification for treating income from capital gains differently from income from wages, salaries, and tips is to reward job creators, then write the law to make sure jobs are being created.
  3. Extend the payroll tax holiday.  Revisit the issue when unemployment drops below 6%, then phase in the increase.
  4. Extend existing individual tax credits.  Revisit these credits as part of comprehensive tax reform.
  5. Enact a gradual sequester plan.  This plan should gradually reduce agency budgets over five years for discretionary spending, including defense.
The first order of business for the new Congress should be a comprehensive overhaul of the tax code.  I'll address that in a future blog post, so say tuned!

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