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The Hill | December 14, 2012
While avoiding the “fiscal cliff” is essential to near-term recovery and job growth, it is just the first step to restoring sustained prosperity in America. It would be catastrophic if negotiations between the president and Congress succeeded in avoiding the cliff but failed to address the fundamental threat of projected debt rising faster than the economy can grow.
We must have fundamental tax reforms that raise revenues and entitlement program reforms that slow the growth of healthcare spending and preserve Medicare and Medicaid for those who need them over the long run.
The “fiscal cliff” is an artificial barrier designed to pressure political leaders to get the nation’s budget on a sustainable path. The worst possible lame-duck deal would be a small one that avoids the cliff and thus removes pressure from policymakers to construct a much larger, multi-year agreement next year. Such a deal would do nothing for long-term fiscal stability.
The disaster in Europe should be teaching us two lessons: Short-run austerity is the wrong prescription for growing weak economies, and countries that allow their debt to rise out of control get into serious trouble. We must avoid the austerity of the cliff but stabilize our long-run debt increase while we still have time to do so in an orderly way. Federal Reserve Chairman Ben Bernanke was crystal clear on these points at his news conference earlier this week. America needs both a short-term deal that avoids the immediate economic damage of going off the fiscal cliff and a long-term deal that restores fiscal sanity.
When asked by the media which was more important, the chairman said “both equally.”
One of the most important elements of the Bipartisan Policy Center’s framework for a lame-duck agreement is a provision that would pressure the 113th Congress through codification of the budget process’ reconciliation mechanism.
The Bipartisan Policy Center’s framework for a major debt agreement has three parts, which could be enacted this month. First, Congress would make a down payment, a set of small, but meaningful, cuts to entitlement spending and reforms that would raise revenue. Second, Congress would establish an accelerated regular-order process that would provide the time necessary to develop major, revenue-raising tax reforms and structural entitlement changes that would slow long-term spending growth, then protect these reforms from procedural dangers like endless amendments and the filibuster. Finally, it would include a backstop, a fallback policy that would go into effect if Congress cannot reach agreement in 2013. A backstop should target the unaddressed drivers of our debt, which include tax expenditures and health entitlement spending.
If, as currently rumored, senior members in the House and Senate in both parties reject this kind of reconciliation mandate, they can doom truly fundamental tax and entitlement reform.
Imagine what a Medicare reform bill or a fundamental tax reform bill would look like after two or three months’ debate on the Senate floor without the time protections of reconciliation or a similar process.
The Bipartisan Policy Center’s Debt Reduction Task Force, which I co-chaired with former Senate Budget Committee Chairman Pete Domenici (R-N.M.), has always emphasized what Bernanke made clear: We must have a short-term down payment that avoids the cliff; a mechanism that compels action by Congress on taxes and entitlements next year; and a long-term plan that stabilizes our national debt as a proportion of our gross domestic product.
A bad short-term deal that allows policymakers to avoid the harder long-term decisions would be a step backward. It might make Wall Street happy for a moment or two, but it will mean serious risk to the prosperity of the American people in the long run.
Politico | December 13, 2012
The fiscal cliff obsession in Washington is missing the whole point of fiscal reform: actually solving our national debt problem. Instead of focusing on an arbitrary target in one area of the budget, fiscal reform should build from a comprehensive goal that stabilizes the debt and provides the certainty and confidence needed to restart the U.S. economy.
We hear many ambiguities like “fiscal sustainability,” “getting our fiscal house in order,” and “living within our means.” Even targets that seem specific, like “$4 trillion of deficit reduction over 10 years” are vulnerable to manipulation – much of the so-called “savings” can be meaningless if it is compared to a fictional baseline, such as one that projects future increases in spending in Afghanistan even though we are already drawing down forces.
Let’s put all of the rhetoric aside and agree on a clear fiscal goal: reducing our public debt to 60 percent of our GDP by 2030. Here’s why this objective makes sense:
Debt as a share of GDP is the best way to measure our actual fiscal progress. The bottom line is how much debt we take on, not how much we reduce deficits compared to worse alternatives. And it’s important to understand our debt in relation to the size of our economy – the bigger a nation’s economy is, the more debt it can handle.
Sixty percent is a sensible target endorsed by many budget experts and economists. It was the maximum allowable level of debt for countries originally seeking to join the Euro – don’t they now wish they had held themselves to that standard! Sixty percent also has broad bipartisan support – five ideologically diverse think tanks recommended stabilizing the debt below that level in fiscal plans they submitted to our foundation.
2030 is a time frame that acknowledges we can’t solve our deficits overnight. Why can’t we do it sooner? Our public debt is already more than 70 percent of GDP, and we are currently running trillion dollar deficits that add to that. Yet cutting deficits too quickly would harm the fragile recovery, and economic growth is critical to any successful deficit reduction plan. In addition, it takes time to tackle the key drivers of our long-term debt: the increasing costs of healthcare and the demographics of tens of millions of boomers retiring and living longer. Nearly all structural entitlement reform proposals exempt those 55 and older to give them time to prepare – changes to these vital programs must be done with fairness and compassion. By definition, this delays any impact on the deficit for 10 years, and 2030 is only seven years after that. But this delay also means that we need to agree on a plan now – as Yogi Berra said, “It gets late early out there.”
Our current fiscal outlook is way off course. On our current path, the Congressional Budget Office projects that we will have an interest tab of about $1 trillion per year in 10 years, and that debt will be 140 percent of GDP in 2030. Borrowing anywhere near that much would significantly harm economic growth, diverting capital and crowding out important public and private investments, not to mention risking a catastrophic fiscal crisis for the U.S.
There’s no shortage of policy options to achieve 60 percent by ‘30. Many plans achieve meaningful deficit reduction within the 10-year budget window, but they must be coupled with structural reforms that ensure that we’re on the right trajectory thereafter.
And, assuming our elected leaders really want to solve the problem, it’s entirely possible to agree by the end of the year on a fiscal framework, combined with an expedited legislative process to enact and enforce legislation in 2013. A credible long-term fiscal plan that is agreed upon now, but implemented gradually, would not only put the nation on sound economic footing for the future, but would build the critically needed confidence that today’s economy so desperately needs.
Pretty soon, the fiscal cliff suspense will be over. This self-inflicted fiscal flashpoint has already hurt our fragile economy due to the uncertainty and fear it has imposed on businesses and consumers. On New Year’s Eve, someone will be toasting a political win. But will it be a victory for the country? That only comes once we have a long-term fiscal plan on target for 60 percent by ’30.
Politico | December 6, 2012
When is a fiscal deal different from a Grand Bargain? When we talk about the solutions to two important and related challenges that we face — the fast approaching fiscal cliff and the even more devastating fiscal abyss that looms ahead due to our projected structural deficits.
The nation’s media and our federal elected officials are currently focused on the fiscal cliff that, unless avoided through a negotiated deal by the end of the year, will trigger dramatic spending cuts and tax increases that could push the nation back into recession. If Congress and the White House send us over the cliff by failing to reach an agreement, it will be a shameful triumph of politics over the public interest for which our elected officials should be held accountable.
But avoiding the cliff must not be our only objective — not when we also face huge structural deficits and mounting debt burdens in coming years that threaten the future of our country and families. What we need to see over the next three weeks is a deal that averts the fiscal cliff and builds a bridge to achieving a fiscal Grand Bargain in 2013 that will help ensure we do not fall into the abyss.
Federal debt now exceeds $16 trillion, and based on full and honest accounting — which includes unfunded Medicare, Social Security and other retirement obligations — puts the overall debt burden at more than $71 trillion, and growing by about $100 billion a week! Put bluntly, we are mortgaging the future of our children and grandchildren at record rates. That is not only irresponsible, it is immoral.
What we need in order to address this fiscal abyss is a Grand Bargain that addresses the two main drivers of our structural deficits: unsustainable social insurance programs, especially health care programs, and a complex, unfair, uncompetitive and inadequate tax system. But a lame duck Congress cannot and should not tackle comprehensive tax and social insurance reforms. It will take dedicated effort in 2013 from the new Congress and its responsible committees, as well as a non-partisan public education initiative sanctioned by the White House, and private discussions with key bipartisan leaders to forge such a bargain.
But what Congress and the White House can do now is solve the cliff dilemma in a way that provides a down payment toward reducing the 2013 deficit on both the spending and tax side, while also paving the way to a Grand Bargain by a date certain next year. And both Republicans and Democrats can achieve all this while saving face if they step away from their rigid partisan and ideological stances. Here are some examples of how it can be done:
The fiscal cliff solution could involve specific spending cuts, including a portion of the automatic defense and other spending cuts now in place. It could allow the payroll tax cut to expire. And it could enact measures to increase the effective tax rates — reflecting the taxes that people actually pay — for those making more than a stated threshold (e.g., $250,000), without boosting marginal income tax rates. For example, Congress could allow an increase in the capital gains rate and tax on dividends to 20-25 percent for anyone whose income exceeds the stated threshold.
Congress could also limit the tax expenditures for those above a certain level of adjusted gross income — say, $500,000 — to include only the two large ones that, due to the Alternative Minimum Tax (AMT), are available to upper middle class taxpayers: the deductions for interest paid on a primary residence and charitable contributions. This approach would save face for Democrats by raising taxes on the wealthy, and for Republicans by avoiding an increase in marginal income tax rates. Other tax rate increases and larger spending reductions would be deferred until a set date in 2013.
If the parties agreed to measures like those above, we would achieve a deficit down payment in 2013, while being able to avoid larger tax increases and spending cuts for enough time to achieve a Grand Bargain. Congress could also increase the debt ceiling limit to a level that would likely expire at or around the same date. As a result of these simultaneous steps, the relevant committees in Congress could be instructed to come up with legislation to form the basis of a Grand Bargain by the applicable date in 2013.
There are two other critical considerations — and that is what the goal should be for a Grand Bargain and what type of fail-safe should be triggered if agreement is not reached by the stated dated. Some see this goal as a certain amount of deficit reduction. But this is a poor criterion because budget baselines are so easily manipulated. Instead, I suggest the goal should be to enact legislation that would reduce debt as a percentage of the economy to 60 percent by 2024, with specified spending reduction and revenue increase targets and appropriate interim milestones. In addition, if a deal is not reached by the stated date, then a predetermined ratio of temporary tax surcharges and spending reductions to both mandatory and discretionary spending could occur to hit the milestone target.
We can avoid the fiscal cliff in 2012 and achieve a Grand Bargain in 2013 if the American people demand leadership as well as constructive and principle-based compromise from our elected officials in both political parties. The stakes are high and the risks very real, and yet the rewards will be great if we are successful. It’s time for results not rhetoric.
New York Times | November 30, 2012
Washington faces two urgent fiscal challenges in the next few months. Before the end of the year, the lame duck Congress, the most polarized in recent history, must negotiate an agreement with President Obama to protect the still fragile economic recovery from the so-called fiscal cliff — the $600 billion in spending cuts and tax increases scheduled to begin to take effect on Jan. 1. Then, early next year, a newly elected but still divided Congress must approve an increase in the federal debt limit. Failure to do so in a timely way would damage confidence, posing yet another threat to the economy’s continued healing.
These two challenges are manifestations of the long-running fiscal challenge confronting the country: the fact that the federal debt is rising at an unsustainable rate. That’s why a political deal to address the fiscal cliff and the debt limit in the near term should be linked to a credible framework to put fiscal policy on a sustainable path in the long term.
By the end of this year, policy makers need to “go fast” to address the fiscal cliff and debt limit and to “go big” to establish the broad outlines of a significant multiyear deficit-reduction plan.
The economy continues to operate far below its capacity. The unemployment rate is at least two percentage points higher than what most economists consider consistent with a full recovery. Other measures, such as the high rate of long-term unemployment and the low labor-force participation rate, reflect an impaired labor market
According to the Congressional Budget Office, gross domestic product is still about 6 percent, or about $973 billion, below the potential level the economy is capable of producing at full capacity. This is the largest gap between actual and potential output following a recession in modern American history.
The weakness of government spending at the state and local level and more recently at the federal level has been a significant factor behind the slow recovery. The phasing out of earlier federal stimulus measures, the expiration of temporary payroll-tax relief and extended unemployment benefits scheduled at the end of the year, and the tight caps on discretionary federal spending already in force mean more federal fiscal drag on the economy’s growth next year even if the fiscal cliff is averted
Ideally, given the shortfall in aggregate demand that is keeping the economy stuck below potential, a deal on the cliff should include an extension of both payroll tax relief and unemployment benefits, as well as other temporary policies to support job creation, such as the employment tax credit for small business and the increase in infrastructure spending proposed last year by President Obama as part of the American Jobs Act.
Alas, it seems unlikely that a deal will contain these measures. At best, if a deal is reached it will probably be limited to tabling the deep spending cuts automatically scheduled to take effect early next year, extending the 2001-3 tax cuts for the bottom 98 percent of taxpayers and raising taxes on the top 2 percent of taxpayers, especially those with incomes over $1 million, through some combination of higher marginal tax rates and caps on deductions.
To improve the economy’s near-term growth prospects, the deal should also contain a promise that Congress will approve the debt limit when necessary without a destabilizing delay.
So far, negotiations about a go-big framework for deficit reduction have focused on cutting at least $4 trillion from the federal budget over the next decade, with the goal of stabilizing and then reducing the debt-to-G.D.P. ratio. The election and recent Gallup polls settled the debate about whether an increase in revenues will be part of the plan. The answer is yes.
The debate has shifted to how revenues should be increased and who should bear the burden. The proposition that revenues should be raised through tax changes that limit deductions, credits and loopholes, in lieu of or in addition to rate increases, is gaining momentum.
Economists believe that raising revenues for deficit reduction through base-broadening tax reforms is probably better for economic growth than raising marginal tax rates.
Although it may prove politically necessary for a bipartisan deal, however, there is no convincing economic justification for using some of the revenues saved from tax reforms to lower marginal income tax rates for high-income taxpayers. These rates are already at historic lows.
And there is no convincing evidence that real economic activity responds materially to changes in these rates, at least within the range of rates experienced in the United States during the last half-century. The tax code should be reformed to make it simpler, fairer and less distortionary and to raise revenues for deficit reduction, not to reduce tax rates on high-income taxpayers.
Over the last 30 years, income inequality in the United States has increased sharply. During the same period, the federal tax system has become less progressive and has contributed to the trend of rising income inequality and widening opportunity gaps between children born into different income groups.
A more progressive tax code, achieved through some combination of higher tax rates and capping deductions for high-income taxpayers, would be a powerful tool both to counteract these trends and to achieve long-term fiscal sustainability.
On the spending side, “go big” bipartisan proposals for deficit reduction, such as the Simpson-Bowles and Domenici-Rivlin plans, focus on curbing the growth of Medicare, Medicaid and Social Security. This is understandable as these programs already account for about 40 percent of federal spending and that share is projected to rise as a result of the aging of the population and the growth of health care costs.
But lumping Medicare, Medicaid and Social Security together is misleading and, given strong partisan passions on Social Security, could weaken the chances of reaching a bipartisan deal on deficit reduction.
Spending on Social Security is rising primarily because of demographics, not because of growing benefits per eligible person. Indeed, the Social Security Trust Fund has adequate resources to cover benefits until at least 2033, and the program’s revenue shortfall is less than 1 percent of G.D.P. over the next 75 years.
In contrast, the argument for including Medicare and Medicaid in a framework for long-run deficit containment is compelling. The single most important factor behind the projected growth in federal spending is the growth in health care spending, driven primarily by the growth in Medicare spending per beneficiary.
The outlook has already improved as a result of significant changes in the delivery and payment of health care services in the Affordable Care Act. As a result of these changes, growth in Medicare spending per enrollee is projected to slow to 3.1 percent a year during the next decade, about the same as the annual growth of nominal G.D.P. per capita and about two percentage points slower than the annual growth of private insurance premiums per beneficiary.
Speeding up the pace of the Affordable Care Act changes along with others, such as reducing subsidies for high-income beneficiaries and drug benefits and introducing small co-pays on home health-care services, would mean even larger Medicare savings.
A “structural reform” popular among Republican deficit hawks like Representative Paul Ryan of Wisconsin to convert Medicare to a premium-support or voucher system would be counterproductive and would drive up both spending per beneficiary and overall costs in the health care system.
The goal of a “go big” plan for deficit reduction should be to ensure the economy’s long-term growth and competitiveness. Yet the debate over spending in Washington is fixated on cutting entitlement spending. Very little is heard about the need to increase federal spending in education and training, research and development and infrastructure, three areas with proven track records in rate of return, job creation, opportunity and growth.
Spending in these areas accounts for less than 10 percent of the federal budget; this share has been declining for several decades and is slated to fall to dangerous new lows as a result of the caps on nonmilitary discretionary spending already in place.
A pro-growth framework for deficit reduction must reverse these trends. More government investment in the foundations of economic growth should be recognized as a core principle of deficit reduction.
Project Syndicate | November 26, 2012
America’s recent presidential election answered the question of whether an increase in revenues will be part of the country’s long-run deficit-reduction plan. The answer is yes: there is now bipartisan agreement on the need for a “balanced” approach that includes revenue increases and spending cuts.
But there are still deep political and ideological divisions about how additional revenues should be raised and who should pay higher taxes. If a preliminary agreement on these questions is not reached by the end of the year, the economy faces a “fiscal cliff” of $600 billion in automatic tax increases and spending cuts that will shave about 4% from GDP and trigger a recession.
The majority of citizens agree with President Barack Obama that tax increases for deficit reduction should fall on the top 2-3% of taxpayers, who have enjoyed the largest gains in income and wealth over the last 30 years. That is why he is proposing that the 2001 and 2003 rate cuts for these taxpayers be allowed to expire at the end of the year, while the rate cuts for other taxpayers are extended.
So far, Obama’s Republican opponents are adamant that the cuts be extended for all taxpayers, arguing that increases in top rates would discourage job creation. This claim is not supported by the evidence. Recent research finds no link between tax cuts for top taxpayers and job creation. In contrast, tax cuts for the bottom 95% have a positive and significant effect on job growth.
During the past three decades, income inequality in the United States has increased significantly; indeed, the US now has the fourth-highest level of income inequality in the OECD, behind Chile, Mexico, and Turkey. At the same time, as the largest tax cuts have gone to high-income taxpayers, the US tax system has become considerably less progressive. The US needs fiscal measures that both curb the deficit and contain rising income inequality – and the inequality of opportunity that it begets.
But how should additional revenues be raised from top taxpayers to achieve these two goals? Most economists believe that increasing revenues by reforming the tax code and broadening the tax base is “probably” better for the economy’s long-term growth than raising income-tax rates. The analytical case for this belief is strong, but the empirical evidence is weak.
In theory, higher marginal tax rates have well known negative effects – they reduce private incentives to work, save, and invest. Yet most empirical studies conclude that, at least within the range of income-tax rates in the US during the last several decades, these effects are negligible.
A recent Congressional Research Service report, withdrawn under pressure from Congressional Republicans, found that changes in the top income-tax rate and the rate on capital gains had no discernible effect on economic growth during the last half-century. A recent review of the economic literature by three distinguished academics found no convincing evidence that real economic activity responds materially to tax-rate changes on top income earners, although such changes do affect their tax-avoidance behavior. So Obama has evidence on his side when he says that allowing the tax cuts for high-income taxpayers to expire at the end of the year will not affect economic growth.
Republicans have proposed tax reforms in lieu of rate hikes on high-income taxpayers to raise revenues for deficit reduction. Obama has signaled that he is willing to consider this approach, provided it increases tax revenues from the top 2-3% by at least the same amount as higher rates while protecting other taxpayers.
The federal tax system is certainly in need of reform. Tax expenditures – which include all deductions, credits, and loopholes – account for about 8% of GDP. Indeed, the US tax code is riddled with special preferences and contains large differences in effective tax rates across individuals and economic activities. These differences distort decisions about investment allocation and financing. Reforms that made the tax system simpler, fairer, and less distortionary would have a beneficial effect on economic growth, although economists concede that the size of this effect is uncertain and impossible to quantify.
Because tax expenditures are so large, limiting them could raise a significant amount of additional revenue that could be used both for deficit reduction and to finance across-the-board cuts in income-tax rates. Analysis of the Simpson-Bowles and Domenici-Rivlin deficit-reduction plans by the nonpartisan Tax Policy Center confirms that this approach is arithmetically feasible. Reducing large regressive tax expenditures like preferential tax rates for capital gains and dividends and deductions for state and local taxes, and replacing deductions with progressive tax credits, could generate enough revenue to finance rate cuts for all taxpayers, increase the tax code’s overall progressivity, and contribute meaningfully to deficit reduction.
But the odds of such an outcome are very low: what is arithmetically feasible is unlikely to be politically possible. Efforts to cap popular tax expenditures will encounter strong opposition from Republicans and Democrats alike. Nonetheless, some tax reforms are likely to be a key component of a bipartisan deficit-reduction deal, because they provide Republicans who oppose increases in tax rates for high-income taxpayers with an ideologically preferable way to increase revenue from them.
Unfortunately, it will take time to negotiate tax reforms – more time than remains until the end of the year, when the 2001 and 2003 tax cuts are scheduled to expire for all taxpayers. But there is still time to negotiate an agreement that extends these cuts for the bottom 98%, and that contains temporary measures to cap deductions and credits for high-income taxpayers in 2013. Such an agreement could help to break the political impasse over whether and how much these taxpayers’ rates should rise next year, thereby preventing the US from falling over the fiscal cliff and back into recession.
Washington Post | November 16, 2012
At the end of the year, the country faces an abrupt series of broad tax increases and blunt cuts to most federal programs unless Congress and the White House act. Most policies that have set up the “fiscal cliff,” a term coined by Federal Reserve Chairman Ben Bernanke, were never really intended to take effect. Many were designed to try to nudge lawmakers to find longer-term solutions to reduce the nation’s unsustainable deficits. Let’s set the record straight about what the fiscal cliff is — and how we can avoid it.
1. The fiscal cliff is mainly about defense cuts and the expiration of the Bush tax cuts.
A good amount of the attention that the fiscal cliff receives in the news media and on Capitol Hill focuses on defense spending cuts or the expiration of the George W. Bush-era tax cuts (which President Obama renewed in 2010). These do make up a large portion of the fiscal cliff: more than $500 billion in defense cuts and more than $2.7 trillion in tax increases over the next 10 years. But they’re just the beginning of the cuts that would affect the economy.
For example, if lawmakers do not patch the alternative minimum tax, that tax threshold, which applies to 4 million people today, could ensnare nearly 30 million people, raising their tax bills by an average of $2,700. Additionally, non-defense discretionary cuts would hit programs for low-income people such as housing and energy assistance. And more than 2 million Americans would lose their federal unemployment benefits.
Additionally, going over the fiscal cliff would likely lead to a recession, causing further job losses.
2. It’s okay to punt on the fiscal cliff for another year.
Some have called on lawmakers to postpone parts of the fiscal cliff by waiving the budget sequester or extending the tax cuts without offsetting the costs. As the end of the year inches closer, such calls are likely to increase.
But making either of these moves without putting in place the beginnings of a deficit-reduction plan would send a dangerous signal to global markets, businesses and the American public that Washington is not serious about fiscal responsibility and, frankly, can’t govern.
In recent months, Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings have said that the United States could lose its AAA credit rating — or face further downgrades in the case of S&P — if steps are not taken to reduce the national debt. Such a downgrade could harm economic confidence and growth down the road.
Furthermore, the threat of the fiscal cliff is the only thing propelling policymakers to work out a larger deal; without it, the prospects of fixing this problem dim significantly.
3. Going over the fiscal cliff wouldn’t immediately damage the economy.
Some experts have argued that going over the cliff wouldn’t cause much immediate economic harm and that any damage could quickly be reversed by retroactively waiving the tax increases and spending cuts. That’s like saying: “Don’t worry about being run over — the car will be off you shortly.” In most cases, the damage is already done.
There is no way to know how the economy and the markets would react to our going over the fiscal cliff, but we should not be willing to find out. As Alan Kreuger, chairman of the White House Council of Economic Advisers, said Friday, there would be a serious psychological effect as well, leading people to think “that government is not capable of solving problems that it’s there to solve.”
Thus far, the markets still believe that policymakers would not be so foolish as to willingly cliff-dive — but the moment they are proved wrong, the markets could go into an expensive tailspin. Like a good reputation, market confidence is hard to get back once you ruin it.
The Congressional Budget Office — not prone to scaremongering — projects that the fiscal cliff would cause the economy to shrink by nearly 4 percent in the first quarter of 2013, enough to cause a double-dip recession. Why risk that?
4. Going over the fiscal cliff will make it easier to get a “grand bargain” on debt reduction.
Some political strategists argue that going over the cliff could turn up the pressure on deficit reduction and make it easier to reach a consensus. This logic goes: Once the tax cuts have expired, Congress can start from a different budget baseline, so that what would have been a tax increase on Dec. 31 will be a tax cut as of Jan. 1. I tried this logic on my 8-year-old son, who said: “Seriously, Mom? That is the dumbest thing I have heard,” reaffirming my sense that this kind of reasoning doesn’t carry water.
We are going to have to make some hard choices to fix not just the cliff but our broader budget problems. For Republicans, that means reforming the tax code in a way that would raise more revenue. And for Democrats, it means embracing structural entitlement reform, with strong protections for the most vulnerable. Waiting for a new baseline doesn’t make this easier, but it does put the country at tremendous risk.
And the idea that it would be easier to get a bipartisan compromise after going over the fiscal cliff completely misjudges how bad the blame game would be at that point. Politicians might think they would work it out quickly, but that’s a dangerous gamble.
5. Going over the fiscal cliff would be the worst possible outcome.
All the attention the fiscal cliff gets from lawmakers, businesses, experts and journalists can crowd out the key message. The looming cliff is an opportunity to make real progress on addressing the central, long-term fiscal challenge facing the United States: debt as a ballooning share of the economy.
There’s no doubt that going over the cliff would impose serious economic costs. But even worse would be blundering along on our current path without change. Our national debt threatens much larger economic consequences than those posed by the fiscal cliff. Down the road, rising debt could substantially hold back economic growth and send the country into a fiscal crisis that would be far worse than even a double-dip recession.
Among all the myths about the fiscal cliff, there is a certain truth. We will have to make changes to our fiscal course — either on our own terms or when the markets force us to. We should choose the first path.
U.S. News and World Report | November 16, 2012
Don't even think about it! Falling off the fiscal cliff would be an economic disaster for the United States. The fall would add over $300 billion in taxes in this fiscal year, along with another $200+ billion in spending cuts and other changes, or a net change in the deficit of over half a trillion dollars in the current fiscal year (9 months of it are left).
The Congressional Budget Office says that our GDP would be reduced by 3.4 percent in fiscal year 2013, and 4.5 percent in calendar year 2013. We are suffering now with a "slow" recovery of 2 percent growth or slightly less, with unemployment still about 7.9 percent. The cliff recession would wreck our economy and make our current national pain seem pleasant.
Worse, the suffering would not gain us much. Taxes would rise on all Americans, including those least able to pay, but little would have been done to reduce the entitlements which are the long-term drivers of our deficits and debt.
According to Secretary of Defense Leon Panetta, our national security would also be imperiled. As would healthcare: Doctors' reimbursements would be cut 27 percent, and many would no longer accept Medicare and Medicaid patients. Nearly 30 million more middle class Americans would be subject to the Alternate Minimum Tax, a form of torture now reserved for more affluent taxpayers.
Also included in the fall would be a failure to extend the debt ceiling. The country would default on its debt and not be able to borrow. Hollywood might be able to dream up a more horrible "nightmare" scenario, but jumping off the cliff will be worse than most normal people can imagine.
There are some members of Congress who have expressed support for the "let 'er rip" concept: That is, forget the negotiations and just jump of the cliff. They see it as a good way to bring more tax revenue, and expect good policy to arise from the ashes of the fall.
Falling—or jumping—off the cliff is good policy, but only if you like recessions, enjoy unemployment, and don't mind living in the ashes. The economists who tell us the fall means a recession are not fooling. The cliff is real, and the fall will be painful. Responsible politicians will avoid it at all costs.
Update (12/12/12): Figure 1 has been corrected from an earlier version that was based on estimates that "stacked" the provision to tax dividends as ordinary income before the provision to increase rates, therefore counting the interaction within the rate changes. This correction does not affect the overall savings, and actual savings from allowing only some of the upper-income tax cuts to expire may differ from the sum in the figures above due to various interactions.