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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.

Legacy Comments14

SCO, in a comment below, apparently thinks raising the top bracket tax rate by 30%, or even by 50%, wouldn't be nearly enough to help solve our fiscal cliff problem. He or she is probably right. I think the top bracket rate should be raised from 35% to 70%, a 100% rate increase - back to the 70% rate before the Reagan tax cut for the wealthy started rolling the debt snowball. But that rate increase might not even be enough. In 1944 and 1945 the top bracket rate was 94% (a 169% increase from the current 35% rate), back when the wealthy acted responsibly and stepped up to pay the WW2 bills. Obama is only asking for a measly 4.6% rate increase to the 39.6% rate under Clinton, which (I agree) is not nearly as high as the rate should go eventually, if we are ever to resolve our fiscal cliff/debt snowball problem.

I agree. Lets go back to the 40's with 40's style tax rates. Similarly, lets go back to 40's style government spending. And regulations.

I'll agree - if we can also go back to the to job outsourcing and energy consumption levels of the "40's". In order to do that we'll need universal health care (which will significantly cut "government spending"), paid for by a sales tax and the individual income tax, so that US manufacturers aren't burdened with health insurance, Medicare and Medicaid costs. Plus we'll need to set up supertanker toll booths in order to recover military and other government costs associated with our dependence on cheap foreign oil, so that consumers then find that they can save money by buying clean energy and energy efficient products. One more thing - because 3 decades of Reagan/Bush tax cuts have effectively defunded our Social Security Trust Fund, we will need to fund it entirely from the individual income tax (without any cap), and put it in a lock box. Seems like maybe we have a deal!

So let me get this straight earthling. You are comparing raising taxes in 1944 and 1945 to raising them now? At that time Europe was in a shambles ecomically. The US was in a boom. Even war was profitable supplying equipment. We were manufacturing a lot of things including TV's. Folks were moving to the suburbs, home building was an an all time high. The economic boom supported raising taxes. There was a lot of money being made. Everybody benefited from jobs and growth. Clinton has the software boom and no wars. He reformed Welfare, less govt spending. Good economic times. So you say that can happen again by raising taxes in bad economic times? High taxes are good only when the economy is doing well, lots of jobs, less govt spending, etc. Economics 101. History supports when taxes were the highest it was because the economy was booming.

I'm not suggesting that we raise the top bracket rate to the 94% 1944-1945 level, but I do think the top bracket rate is way too low. It has been way too low for 3 decades. The US was in a boom under Reagan, created largely massive defense spending increases and to some degree by a huge top bracket tax cut from 70% to 28%. If "High taxes are good only when the economy is doing well", why didn't Reagan raise the rate as the economy improved? Instead he continued to lower the top bracket rate: 1982 50%, 1987 38.5%, 1988 28%. This is when the debt started to snowball due to lack of revenue lost to the top bracket rate cut. Clinton raised the rate as much as Republicans would allow, when the economy improved - but that rate increase was not enough to reduce the debt - it kept climbing because Clinton was stuck paying an average yearly interest expense of 338 billion ($75 billion/yr when Reagan took office), mostly on the debt he inherited, and he still had to borrow to pay for the huge ongoing (and still ongoing now) Reagan top bracket tax cut revenue shortage. Interest expense continues to rise because of the ongoing Reagan and now Bush tax cut borrowing. Over the last 4 years interest has cost us $402 billion per year, and we've borrowed it all. We're borrowing to pay for the tax cuts, and we're borrowing to pay for the interest expense on the borrowing for the tax cuts. Take a close look at this list of historical tax rates http://www.ntu.org/tax-basics/history-of-federal-individual-1.html Note that the top bracket rate was 69.125% in 1981 when the debt was manageable at less than $1 trillion and at 35% of GDP (now about 100% of GDP). We have to get this under control, and the wealthy need to step up - their tax rates are extremely low historically.

Let's face it, both parties are equally to blame here for letting important fiscal decisions slide year after year. Even now, with a hard deadline, they are playing games. Some simple solutions. 1. Put all govt. employees from the president to the janitor on the same pay scale as active duty military. No benefits after leaving office. 2. Fire all contractors, and limit all future contractors to 6 months for life. 3. Lock all member of congress in a room together. Have each propose a cut of at least 1 billion dollars and have a straight up or down vote. Repeat the process until a balanced budget is achieved. 3a. Eliminate all foreign humanitarian and military aid, and all disaster aid to states. 4. Unlock for 24 hours, and return for the same procedure on tax increases. 5. From then on, make every odd year devoted only to removing old laws and getting rid of fat. 6. Even years for new spending or new legislation.

Nice post, I totally agree

This administration compromises likes this. Cut Taxes and then we will work on entitlement reform. Take our word we will do that down the road! History tells us that promises made, without a plan agreed to on how and where those reforms will occur, means they never happen. If the Dems were serious about doing anything they would have a plan. There is a reason why they have not produced a budget. They do not want to be constrained in their spending. This editorial gives lip service to yeah we need to look at reforms. Then states we can get rid of the charitable deduction. So get rid of the chartitable deduction, then see what happens. My guess is that folks on a tight budget will stop giving to charities. The rich are not hurt by that, middle class is. Cannot raise the age of rretirement either. Like our present administration in the WH, we see yet again the Left has no intention of reforms. Compromise requires two sides to work. What did President Obama put on the table? Zippo!

"People in the top income brackets have been paying historically low rates" for 3 decades. The 50 year average top bracket tax rate from 1932 through 1981 was 79%. The 30 year average top bracket tax rate from 1982 through 2011 was 38%, less than half of the previous 50 year average rate. For 3 decades a handful of Republican multi-billionaires have drastically increased their wealth and power by effectively bribing political candidates with huge campaign/super pac contributions. Each election cycle the handful of Republican multi billionaires contribute a few hundred million dollars to entice low info/one issue voters into voting for candidates who will provide the same multi billionaires with $billions more in top bracket and capital gains tax cuts. If we allow this to continue, the Republican Party, led by the likes of the multi-billionaire Koch brothers, will eventually push America right off the top of a fiscal cliff. http://www.ntu.org/tax-basics/history-of-federal-individual-1.html

"As Warren Buffett pointed out in The New York Times this week, the Forbes 400 richest Americans have a combined wealth of $1.7 trillion. That sounds like a lot, and once upon a time it was. But today, if you confiscated every penny the Forbes 400 have, it would be enough to cover just over one year's federal deficit. And after that you're back to square one. It's not that "the rich" aren't paying their "fair share," it's that America isn't. A majority of the electorate has voted itself a size of government it's not willing to pay for." Simply put...its the spending stupid!! http://www.ocregister.com/opinion/percent-379256-government-spending.html

So only 400 Americans would pay more taxes if the top bracket rate increased? "Simply put.....it(')s the tax cuts stupid!" that put America on a fiscal cliff.

Correction (the CM site downgrade does not allow editing): "Simply put....it(')s the" tax cuts "stupid"

From that same article I linked to....."A couple of years back, Andrew Biggs of the American Enterprise Institute calculated that, if Washington were to increase every single tax by 30 percent, it would be enough to balance the books – in 25 years. If you were to raise taxes by 50 percent, it would be enough to fund our entitlement liabilities – just our current ones, not our future liabilities, which would require further increases. This is the scale of course correction needed."

Fiscal cliff - Doomsday machine. I have to ask, if these are the words used by CONGRESS to describe what CONGRESS agreed on then WHY did they agree to it. ………….…. Interesting how the deduction that this paper started with not to stop was charitable deductions, a little ironic that it implies that one gives to charity but only if they get something in return for it.

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