By now, just about everyone who pays attention to news of any kind, even those glued to their TV or smart phone for the latest update on Kate Middleton’s pregnancy, has heard about the “fiscal cliff.”
The cliff refers to the $400 billion in tax increases and $100 billion in across-the-board spending cuts to military and domestic programs set to take effect on Jan. 2. These simultaneous tax hikes and spending cuts, the result of expiring Bush- and Obama-era tax cuts and kick-the-can-down-the-road legislating on debt reduction, are referred to as a “fiscal cliff” because most economists, including the head of the nation’s Federal Reserve bank, predict their one-two punch will have a catastrophic effect on our nation’s already struggling economy.
While this burst of revenue and spending restraint will reduce the nation’s overall $16 trillion debt, it could do major damage to the economy in the short term. Stymied growth, a stock market plunge, increased unemployment and maybe even a second recession are just some of the anticipated effects.
One would assume, then, that finding a way to avoid such a wholly man-made disaster would be priority number one in Washington. Congress and the president would be urgently working together to craft a balanced plan that keeps some of the tax hikes and spending cuts from taking place while allowing others needed for debt reduction to take effect, and that the 218 votes needed in the House and 60 required in the Senate would be found to get the plan enacted.
But unfortunately in Washington, there’s always plenty of talk about urgency but no one ever acts urgently. Indeed, there are some Republicans and Democrats who say taking the nation over the fiscal cliff — allowing the abrupt tax increases and spending cuts to take place — wouldn’t be such a bad thing. They believe the dire consequences being projected, should they actually take effect, could help secure their side more political advantage in future debt-reduction negotiations.
This is crazy talk. No one knows what allowing this much pain to take place at once will do to the economy. That’s why we need a logical, balanced approach now that allows some of these taxes to increase while crafting spending cuts so they do the least amount of damage.
President Obama has offered a plan that takes this balanced approach. Under the president’s proposal, the Bush-era tax cuts for individuals earning at least $200,000 annually (and families making $250,000 a year) would not be renewed when they expire on Jan. 1. Instead, those taxpayers would see their rate rise from 33 percent to 35 percent (and 36 percent to 39.6 percent), meaning any income over $200,000 ($250,000 for families) would be taxed at the higher rate. Obama estimates raising rates for these high-wage earners back to the level they were in the 1990s would generate an estimated $1.6 trillion over 10 years to put toward debt reduction.
Polls suggest a majority of Americans support ending the Bush-era tax cuts for the wealthy, particularly if it will prevent the nation from going over the fiscal cliff, and especially if the middle class will be expected to sacrifice through changes to entitlement programs like Medicare and Social Security.
There’s also some political legitimacy for Obama’s position: the president defeated Republican challenger Mitt Romney last month in part by campaigning on the issue of higher tax rates for America’s top earners.
House Republicans refuse to bow to those realities, however. Their leader, House Speaker John Boehner, R-Ohio, remains adamant that GOP lawmakers will not agree to any fiscal cliff proposal that includes any increase in tax rates, even if those being proposed by Obama would affect only 2 percent of taxpayers, and even if their refusal means we go over the fiscal cliff.
Instead, Republicans have offered their own plan that relies more on spending cuts, including $600 billion in savings to programs like Medicare and Medicaid. These “savings” include increasing the age of eligibility for Medicare from 65 to 67 and lowering cost-of-living increases for Social Security recipients. The GOP plan does envision $800 billion in new revenues, mostly by way of eliminating deductions for top earners and creating lower tax rates similar to those suggested by the Simpson-Bowles debt reduction commission in 2010. However, the GOP plan doesn’t spell out which deductions would be eliminated.
Even though the plan is vague on details, raising the eligibility age for Medicare and reducing COLAs for Social Security recipients are serious proposals for reducing debt. The exploding cost of these social safety net programs is in fact a major driver of the debt. But they are also two of the most popular programs the federal government manages. So delaying when Americans can take advantage of them or reducing their benefits will be painful for millions of recipients. Politicians who even dare to discuss such changes do so at their own peril.
To his credit, President Obama recognizes that danger but is still prepared to discuss these cuts with Republicans if it means reaching an agreement to avoid the fiscal cliff. The president realizes that any serious debt reduction plan will require a balanced approach to taxes and spending.
House Republicans, however, continue to refuse the balanced approach. They continue to cling to a fictional orthodoxy that keeping taxes low on the wealthy grows jobs. That view was thoroughly discredited during the Bush era, when despite the large tax cuts during the early 2000s, there was a net gain, after eight years, of only 1 million jobs. That contrasts to the millions of jobs created during the Clinton presidency, when the tax rates on the wealthy were the same as those now being proposed by Obama.
Fortunately, there have been a few cracks in what had been a solid GOP wall of opposition to the balanced approach. Unfortunately, these dissenters are still few in number and the countdown to Jan. 2 continues. We can only hope that in the little more than three weeks left before we go over the fiscal cliff, more courageous Republicans step forward, reject their party’s irresponsible no-tax-hike pledge and put the soundness of the nation’s economy first.