How to Avoid the Fiscal Cliff

Just as Washington created the fiscal cliff, Washington can make it go away.

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I wrote a magazine piece this week about some ways Republicans and Democrats could avoid the fiscal cliff, with suggestions for tax increases, spending cuts, and, you probably guessed it, some fiscal stimulus up front. As I wrote:

One positive byproduct of the cliff debate has been an emerging bipartisan consensus that instant austerity—which Republicans had been clamoring for since President Obama took office—could create a double-dip recession. That’s what severe belt-tightening did in the U.K. and Spain. So while it may sound amusing to hear Republicans who loudly proclaimed that spending cuts would restore the economy suddenly sounding Keynesian alarms that Pentagon cuts will kill jobs, it’s a big step forward. If Republicans and Democrats can agree that federal spending can help boost growth, maybe they can agree on a budget deal that would help the economy now while putting the government on a more sustainable path for the future.

One point I made is that there are lots of good ways to raise revenue, because as I tried to show in my recent cover about our subsidized lives, there are lots of tax benefits (for home mortgages, employer-provided health insurance, 401(k) savings plans, charitable donations, and more) that mostly incentivize well-off people to do things they probably would have done anyway. They are politically popular, but negotiators ought to limit them as much as possible. If they’re worried about raising taxes too much, they can offset some of the increased revenue by slashing corporate taxes and payroll taxes that bite companies and families.

Another point that’s gotten lost in the fiscal furor: Obama and congressional leaders manufactured the cliff to try to force themselves to reach a grand bargain that would enact trillions of dollars worth of deficit reduction. But the final bargain can be as grand or as modest as they want it to be. We’ve got a long-term deficit problem, but it’s not a short-term deficit crisis. We’re not Greece. And just as Washington created the cliff, Washington can make it go away.

Anyway, the article is for subscribers only. So subscribe!

19 comments
SaneVoice
SaneVoice

How about letting Fiscal Cliff happen? 

It looks nobody agrees what to be cut? So the best thing is cut across the board and increase in taxes...

Man!! if we cannot take 5-10% cut i.e. $1T in 10 years in government spending. Then we are big trouble. I don't think we cannot balance the budget and reduce deficit. Also increases in taxes is not much it is going back to Clinton time not 1970s  If we do that I know next 1-2 years will be bad but we will have balanced budget in 4 years and will be going for 

Also, I think we should close all the loopholes to give into republicans wishes to balance the budget and reduce deficit as part of increasing the debt ceiling.

mary.waterton
mary.waterton

I have a much better solution to avoiding the fiscal cliff:

Right now the Federal Reserve is monetizing debt at a rate of $45 BILLION/month. That’s a HALF-TRILLION per year. Economists keep telling us that it’s good for the economy and creates jobs. So why stop at $45 BILLION/month? Have the Federal Reserve increase their quantitative easing to $200 BILLION/month and that will stimulate even more economic growth, create even more jobs, and cover the entire $1.5 TRILLION deficits as an added bonus. No need to raise taxes. No need to cut anything. No debt ceilings to be raised. Problem solved.

kbanginmotown
kbanginmotown

 Anyway, the article is for subscribers only. So subscribe!

What? And enable you and the High Sheriffs to purchase LiveFyre 2.0 ??!?No, thanks.

DeanLogic
DeanLogic

401(k) savings plans

Why does the government have any right to money I am saving so that I won't be a burden to others when I quit working?

Please enlighten me to the time, that when given more tax revenue, the government decided to spend less and actually spent less.

destor23
destor23

I'm not sure, however, that most citizens view various subsidies and deductions as mere incentives in the way economists do.  Many view these deductions, not inappropriately, as a moral right.  The argument goes, "Come on, before you take my money to spend it invading Iraq, let me make my house payment and save for retirement."

gysgt213
gysgt213

If you don't see any comments from me. Its not for my lack of trying.  

MrObvious
MrObvious

Ask yourself how many times Mitch McConnell bitches like a lil' spoiled kid when Democrats tries to do something about either what's broken or want to find solutions to our problems.

Obama going directly to the people - 'OMG he should sit down with us like he did before and when we stabbed him in the back over and over and did nothing.'

Reid considering changing the Filibuster rules - 'OMG - if you do this we will obstruct every bill (O.o)'

Long is the list where media have given GOP leadership the microphone to complain about the very thing they refuse to do - LEGISLATE.

So avoiding the fiscal cliff is a matter of two sane parties coming together. But when one party insist on being lazy and bitch about the other side for nothing doing all they ask for and when the opposition tries to negotiate with them, they stab them in the back - solutions are going to be far away at the horizon.

Media just need to take away their microphone or call them out on their BS. The largely ignorant low information base will sooner or later realize that the reason things don't get done is because the people they vote for is by large dysfunctional.

grape_crush
grape_crush

It's a fair article, Grunwald, and the key point that this creatively-manufactured crisis can be resolved with a creatively-manufactured solution is well stated.

But I don't think the issue is as much about how to go about 'fixing' things; reasonable people can agree on reasonable things. The problem is that there's a certain proportion of our legislature that's hell-bent on being unreasonable and would like to use this creatively-manufactured crisis to push through a lot of bad policy.

PaulDirks
PaulDirks

Micheal, I think your mistaken to think that the 'charitable deduction' incentivises people to do things that they would do anyway. The use of 'Foundations' to shelter income and allow the wealthy to attach their names and their reputations to visible projects is a direct result of the tax code.

Paul,nnto
Paul,nnto

Slashing corporate taxes? Why?

"According to the Congressional Budget Office (CBO) report released on Tuesday, the overall corporate tax rate (corporate receipts as a percentage of domestic economic profits) in 2011 dipped to 12.1 percent, an all-time low over the 40 years for which CBO has tracked this data, and less than half the historic average of 25.6 percent. As the Wall Street Journals notes, this is even as corporate profits are on the rise."

http://ctj.org/taxjusticedigest/archive/2012/02/cbo_confirms_us_corporations_p.php 

SaneVoice
SaneVoice

@DeanLogic 

Excellent point! But same applies to defense spending - one of the major expenditures that is creating deficit. 

People will disagree But the truth is the current deficit is not created by SS or Medicare/Medicad? It is going to go negative as more and more baby boomers retire. 

chupkar
chupkar

I love this post so much I can't even press "like".

HudsonValleyTim
HudsonValleyTim

@Paul,nnto The problem is that we shouldn't be looking at our history. We should be looking at the playing-field as it cuurrently exists (and is likely to be over the next, say, 15 years). Nobody cares if our tax rate is the lowest that its been in 40 years, they only care that they can move their manufacturing to Ireland and recoup their costs within 10 years due to the highly favorable tax differential (and cheaper labor). If you're an antelope, it doesn't matter if you're the fastest you've ever been...it only matters that you're faster than the herd around you or you're going to get eaten.

PaulDirks
PaulDirks

@Paul,nnto Arithmetic. revenues = tax rates X profits - tax avoidance strategies. But look on the bright side. Finding and implementing tax avoidance strategies creates accounting jobs!

MrObvious
MrObvious

@HudsonValleyTim 

But it also helps when you create a legislative and regulatory environment when this is actually rewarding.

There's a reason why Germany manages to keep their manufacturing industry despite higher taxes and labor cost - they make sure it stays there. I don't see anything wrong in USA ensuring that it's original industry stays in USA and benefit American citizens.

It shouldn't be our political systems job to benefit every single low tax and low labor cost country in the world.

HudsonValleyTim
HudsonValleyTim

BTW, I speak from the experience of having worked at a Pfizer plant that was shuttered so that they could move mfg. to Ireland...

Paul,nnto
Paul,nnto

Truly they are the job creators.

MrObvious
MrObvious

@HudsonValleyTim 

I'm all for giving tax breaks to companies that stay here. It helps local communities all the way up nationally. It also keeps our manufacturing process and innovation inhouse - as suppose to be leached by low labor cost nations so they can start up their own industries stealing our ideas and then force out the company that was stupid enough to move there in the first place.

A 10-15 percent tax rate for anyone that keeps their manufacturing in our country with the incentive of a strong educational system to train their workers and 30 percent for ANYONE that want to move their manufacturing to a different country when they import their products to be sold here.

And remove all kind of Cayman Island BS. No tax incentives or loopholes for people that feel they can socialize all the losses on our backs while capitalize their gains.

HudsonValleyTim
HudsonValleyTim

@MrObvious @HudsonValleyTim Absolutely agree....The Pfizer plant I was at was the innovator and manufacturer of Prevnar...the most profitable vaccine in the universe. We made it there since day-1, and besides chasing profits, there was no reason to move it. I would contend that a stiff legislative penalty should be put on companies who do such things for no other reason than to enrich their stock holders.