Editorial: Some alternatives to the fiscal cliff
The fiscal cliff is approaching. Barring congressional action, on Jan. 1, the George W. Bush tax cuts will expire and monumental cuts to defense spending and social programs will begin. In truth, the cliff is more like a long slope that, unless the fall is arrested, guarantees a slide back into recession. The spending cuts will not occur immediately. They’re scheduled to be phased in over the next two years. That gives Congress and the president time to modify or reverse most of them. It also means that if the current Congress can’t reach a compromise, its replacement has a chance to roll back some or all of the tax increases before they do much damage to the economy.
It would be best not to go over the cliff. Uncertainty over government spending and tax policy would rattle the stock market and lead to layoffs and a rise in unemployment. But it would be even worse to pass on the opportunity presented by the Doomsday machine Congress created.
Reducing the deficit requires work on both sides of the ledger. Spending must be cut and, as an increasing number of Republicans have come to admit, revenue must be increased. Whatever they do, President Obama and Democrats should not cave on allowing the tax cuts for the rich to expire. People in the top income brackets have been paying historically low rates for nearly a decade and the public, by a wide margin, supports increasing taxes on them.
The president insists on letting the tax cuts on incomes over $200,000 per individual and $250,000 per household expire. Republicans object, but they’ve given ground by conceding that raising revenue by limiting deductions that benefit the wealthy the most might be okay, so long as spending on social programs including Medicare and Medicaid, is reduced. In our view, all three things need to be done, but as usual, the devil is in the details.
The top tax rate of 35 percent is lower than it’s been for most of the past century. Allowing it to return to the Clinton-era rate of 39.6 percent will neither harm the economy, reduce the incentive to work on the part of the wealthy nor hurt small businesses, only 2.5 percent of which will be affected by the increase, according to the Treasury Department. Allowing the top two rates to rise from 33 percent to 35 percent, and from 35 percent to 39.6 percent, will raise about $1 trillion over a decade. Eliminating or capping some, but not all, deductions, could then increase revenue enough to meet the president’s minimum goal of a $1.6 trillion increase over the decade. That’s not enough, but it’s a start.
What deductions should go? Not the one for charitable contributions, for example. But the deduction for state and local taxes should be scrapped. It forces taxpayers in poor states, or low-tax states like New Hampshire, to subsidize taxpayers in high-tax and high-spending states like California and New York. And the mortgage interest deduction should be capped on primary residences and eliminated for mortgages on second, third or fourth homes.
The growth in entitlement spending must be restrained. Increasing the age of eligibility for Medicare to 67 or 68, for example, as some Republicans have suggested, would be cruel and cost more than it saved. But means-testing Medicare makes sense. So does eliminating fraud that bilks taxpayers of billions, and finding ways to reduce the cost of health care for everyone, including recipients of Medicare and Medicaid.
The cliff can be avoided if Republicans come to their senses, but going off it would be preferable to continued reliance on the failed trickle-down economics their party supports.