Viewpoint: Why We Should Go over the Fiscal Cliff

We have nothing to fear from the cliff, and it will get us closer to fundamental tax reform

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The fiscal cliff is a powerful metaphor. It sounds like an impending disaster, but in reality, we’ll wake up on the morning of Jan. 3 and life will be unchanged. Sure, tax rates will nominally be higher, some tax breaks will have been canceled, and the government will be expected to implement major cuts in military and domestic spending. If that continues for several months, it will have an adverse effect on the economy.

(VIDEO: TIME Explains: The Fiscal Cliff)

But letting the law take effect will also have some real benefits. For one thing, on the other side of the cliff, we’ll be a big step closer to the kind of fundamental reform of the tax code that both Democrats and Republicans say they want. Two provisions that limit the deductions and personal exemptions the wealthy can take — similar to the cap on deductions proposed by Mitt Romney — will come back into effect. Capital-gains rates will rise from 15% to 20%, and dividends will be taxed at normal rates, reducing the incentives for tricks like the notorious carried-interest loophole. And instead of a tax system that produces less revenue as a percentage of GDP than at any time since 1950, we’ll move toward one that is adequate to the needs of a modern, dynamic economy. The fiscal cliff is, all by itself, a budget deal and a step toward tax reform. A flawed and dangerous one, to be sure, but a far better starting point for a real budget agreement than the temporary rules of 2012.

Once tax rates and other provisions have returned to their previous levels, as planned, Congress and the White House will have a little time to look at taxes and spending and decide how best to keep the economy moving now and in the future. Is it by cutting taxes for low- and middle-income working families, who were hit hardest by the recession and gained little in the George W. Bush years, when most of the benefits of growth went to the top? Or is it another round of tax cuts for those who have gained the most?

(MORE: Fiscal-Cliff Deal? Don’t Hold Your Breath)

Let’s remember also that the fiscal cliff is not a natural phenomenon; it’s the law. None of the tax cuts that will be changed by it were supposed to be permanent in the first place. Some of the cuts — mostly those from the early Obama years — were to provide economic stimulus during the recession. Those should be revisited every couple of years, and if we think the economy still needs a boost, we should renew them for another year or two. But the bulk of the tax cuts that expire date from 2001 and ’03. At that time, when our country had budget surpluses, both Democrats and Republicans wanted to cut taxes. But Republicans wanted to cut them by about twice as much and to make much bigger cuts for the wealthy than for the middle class. Rather than compromise with Democrats, Republicans twice employed a special rule, known as reconciliation, to use their narrow congressional majorities to push their version of tax cuts through. Because that special rule can’t be used to make permanent changes that worsen the deficit, they had to put an expiration date on those tax cuts. So the fiscal cliff is a long-overdue chance to revisit choices from the past and better address what we need to do for our future.

(PHOTOSThe Recession in Pictures: America Copes with a Stagnant Economy)

In the world on the other side of the fiscal cliff, Democrats and Republicans will have no choice but to work together on tax cuts that will be fairer to the middle class and encourage economic growth. And then, over several years, we have an obligation to look closely at Medicare in particular and figure out how to slow the growth of health care costs in that program. That work can only begin on the other side of the fiscal cliff.

86 comments
LenSimpson
LenSimpson

Amazing how quickly we went from a relatively small surplus to an absolute massive deficit. is there an explanation somewhere in the etherworld?

dobermanmacleod
dobermanmacleod

Frankly, I am sick of the media scaring people.  It is always some kind of crisis - one the one hand it is a financial crisis brought on by the rising deficit, and on the other hand it is the "fiscal cliff."  Either we want to pay our bills and balance our budget, or not.  The media is just trying to scare people so they will want to read up on the latest crisis.  Read the book Abundance: the view the media has saturated the public with is contrary to how the real world is shaping up.BTW, it is tragic that our government is working with such flawed budget numbers.  Soon a new energy technology will emerge that will super-charge our economy (imagine, as an example, 1 $/gal gas):

"A volume about the size of a #2 pencil eraser of water provides as much energy as two 48-gallon drums of gasoline. That is 355,000 times the amount of energy per volume – five orders of magnitude." ( http://oilprice.com/Energy/Energy-General/New-LENR-Machine-is-the-Best-Yet.html ).This phenomenon (LENR) has been confirmed in hundreds of published scientific papers: http://lenr-canr.org/acrobat/RothwellJtallyofcol.pdf"Over 2 decades with over 100 experiments worldwide indicate LENR is real, much greater than chemical..." --Dennis M. Bushnell, Chief Scientist, NASA Langley Research Center"Total replacement of fossil fuels for everything but synthetic organic chemistry." --Dr. Joseph M. Zawodny, NASABy the way, here is a survey of some of the companies that are bringing LENR to commercialization: http://www.cleantechblog.com/2011/08/the-new-breed-of-energy-catalyzers-ready-for-commercialization.htmlFor those who still aren't convinced, here is a paper I wrote that contains some pretty convincing evidence: http://coldfusionnow.org/the-evidence-for-lenr/

JohnPatterson
JohnPatterson

Going "off the fiscal cliff" would not hurt the wealthy.  

The other side of the fiscal cliff is an even deeper recession which would hurt middle and lower class Americans.  The 16% U6 unemployment we have now could increase by another 10%.

Rather than playing chicken, both parties should take the cliff of the table immediately.

Ol'Bob
Ol'Bob

I suspect that we will, in fact, "go over the fiscal cliff".  The Republicans, with their usual distaste for actual governance, will be attempting to make political points - if not immediate ones, then ones for the 2014 elections.  The Democrats would also be happy to have "the fiscal cliff" as a bit of political ammunition going into the next elections, with the added benefit that it actually gets them some of what they want.  Neither side will compromise; neither side wins; neither side loses.  And thus we end up with one more example of gridlock and foolishness in Washington...

ks1234
ks1234

The Republicans represent the wealthy and don't care for the midlle class or the poor just as Romney said during the election. They have fought ferociously to make the Bush tax cuts permanent and will not compromise on that. So it is better for the middle class and the poor to let the fiscal cliff deadline expire as the article suggests. That will allow the Democrats to introduce legislation to provide tax cuts for the middle class and the poor.

GaryRMcCray
GaryRMcCray

The global society and civilization is destabilizing, resources are getting both depleted and more controlled by interests who's primary goal is to use them to amass fortunes for themselves while draining the economy as a whole to do so.

Excesses have lead to global warming that may be cataclysmic in a very few years as well as toxic pollution of the oceans and our freshwater supplies. Land itself has been over used, over fertilized and abused by high intensity agriculture.

Sooner (rather than later) a domino will fall that cannot or will not be propped back up or compensated for by emergency action and then they will all come down and our governments, our infrastructure and our entire global civilization will fail horribly and very quickly.

When this happens most of the earths population of human beings will die.

We have already shown a considerable propensity to inject an emergency measure or two at the last possible moment but the mounting pressure means that soon it either won't be enough or it will just simply be too late.

The bottom of the "fiscal cliff" may be further down than you think, or maybe not - - - yet.

PRob38
PRob38

gee what a thought go over the fiscal cliff. when you think about it I would speculate that Obama would want that to happen then blame republicans.  That's the only reason why this would occur. at the end of the day the problem with Washington is taxing it's spending and that's where this argument needs to start-the federal gov't needs to not recklessly spend money it doesn't have. 

DeweySayenoff
DeweySayenoff

I believe there is one MAJOR issue being overlooked by the concept of diving over the "cliff": The economic impact.  

On a fundamental level, the economy is driven by bottom-up spending.  I think we can all agree that the ONLY sector of the economy aided by "supply-side economics" is the wealthy.  Bottom up spending is people spending money for the goods and services that businesses offer.  That generates demand, which in turn generates new job creation. The price they offer for those goods and services is utterly moot if the customers have no money to spend in the first place (Which is why top-down economics doesn't work).

And that is where this idea of going over the cliff being "okay" goes badly wrong.  In proportion of their income to expenditures, the wealthy do not spend nearly as much money as the Middle Class and the poor.  By and large, they invest it.  By NOT spending the money, the economy is stalled.  The Middle Class and Poor both spend much larger proportions of their income and because there are a lot more of them than there are of the wealthy, they actually outspend the wealthy with smaller, individual spending.  THAT is the spending that's helping the economy recorver.  If they had more money to spend, the economy would be recovering a lot faster.  

But if the tax hikes hit the Middle Class, the proportion of their income that can go to spending is decreased.  A little decrease across a LOT of people means a hell of a lot of decreased spending.  Money isn't circulating into the economy from the bottom up.  The economy stalls.

Now, this is basic stuff.  It's how it works on a fundamental level.  So we can at the very least expect to see the people who spend, getting and spending less.  That is very likely to have a negative effect on the economic recovery, stalling it or even making things worse - increased unemployment and a return to recession.  At the very least it will likely have a chilling effect on NEW employment and job creation.  Given that the inertia of the economy can be drastically affected by public opinion about things, if people THINK things will get worse, they will.

The question then becomes is it worth stagnating the recovery (or making it go back into recession) for the sake of something WE CAN FIX WITHOUT THE "CLIFF"?

If we maintain the status quo - that is to say extend the tax cuts and such until the new congressional session where we won't have a bunch of spoil-sports screwing up Congress who will be replaced by people who have a new mandate (WORK IT OUT!) - there's no reason to endanger what little recovery we have.  We can look at the good of the fiscal cliff (closing loopholes and increasing taxes on the wealthy, who sure as hell can afford them, trimming excesses in the budget including actual handouts, trying to match spending to tax revenue) while avoiding the bad (increased taxes on the spenders who actually drive the economy).  Instead of rushing over the "cliff", we can climb down carefully and deliberately to get the tax reform we so desperately need without as much suffering of the poor and middle class the alternative could very well create.

There is a balance in the system that can be achieved by shifting the fiscal burdens appropriately with respect to fairness in AFFORDABILITY rather than percentages.  Find that balance and the system will run well.  We don't have it yet because the debt is so large.  But if you reliably put money int he pockets of the spenders, the debt will take care of itself.  They'll spend, more people will become employed, more taxes will be collected and (assuming the government can get its collective crap together and budget correctly), we'll stop deficit spending and, maybe even lower the debt.

There's no reason we need to go over cliffs to do that.  We just need reason in Congress.

Mace
Mace

It they do not hurry there will no longer be much of a middle class.

66garrett
66garrett

Our tax system needs reform, and we need spending restraints as well.  We are only collecting 15% of our national income in revenue, yet our spending is at  about 24% .  The difference is the growing national debt we face.  I believe that both of those numbers should be at about 20%.  How we get to this level is the difficult part, because, no one really wants to receive less in govt benefits, but no one wants to pay more in taxes, also.    But, maybe some leadership will emerge in Washington to do what is best, as opposed to doing what is popular, for a change.

rohal
rohal

Clearly, capital gains rules need substantial revisions.  Ceos should not be able to use them to reduce taxes on the stock options they are granted by their company boards as these are essentially commissions.  The compensation of hedge fund managers and investment bankers should also be viewed as commissions and be taxed as ordinary income.

Mortgage interest tax deductability should be limited to the first $300,000 of mortgage only.  Finally, there should be a minimum tax that all corporations have to pay.  It is unacceptable that 30 major and profitable corporations be able to use loopholes to pay no income taxes.  In addition, corporations should be fully taxed on all world-wide income, and not be able to hide it offshore.

Lastly, the grants paid to the oil and gas industry and to agrobusinesses should be eliminated.  All future grants and breaks should be directly tied to domestic job creation (only for full-time permanent jobs).

MyView
MyView

I think it is a good idea to be unafraid of this so-called 'fiscal cliff'. Once tax rates have reverted back to where they were at the 1990's levels the Congress will pass subsequent tax cuts for those earning less than $250,000 per year. No "conservative Republican will vote against such a  bill, if they want us to pay for more tax breaks for the wealthy they can put it in a separate bill.  (Realistically the tax cuts should be greater for those earning less than $45,000/year. After all consumer spending  makes up 75% of the economy.  And poorer people spend all their money, they don't hide it in foreign accounts and just sit on it, they put it back into the economy) Once the spending cuts go into effect the Republican "conservatives" will be facing big cuts to things in their states and of course if the message is made clear to the local populace that it is the fault of the Republican so-called "conservatives" who are just really servants of the rich, there will be a backlash against the Republicans and inroads can be made to recapturing those voters who used to be strong Democrats until the race divisiveness occurred during the 1960's and '70's .

FanEnough
FanEnough

The extremely low rate of commenting on this article suggests that most readers quietly understand that Mr. Schmitt wrote this article in gest.

prioripete
prioripete

yeah, but it's a bottomless cliff!

usresham
usresham

THE QUESTION IS HOW TO GET OUT OF THE FINANCIAL MESS. 

 IT WILL BE  A SLOW PROCESS BUT DO WE HAVE A SOUND AND BALANCE PROCESS?  

FISCAL CLIFF IS GOOD OR BAD ONLY PUNDITS CAN TELL BUT THE FACT IS WHEN THE TWO POLITICAL PARTIES ARE NOT READY TO COOPERATE PEOPLE WILL SUFFER IN SHORT AND LONG RANGE.

FISCAL CLIFF SEEMS TO BE BETTER FOR THE NEAR FUTURE. GROVER'S STRANGLE HOLD ON REPUBLICANS WILL BE BROKEN.

Libertyship46
Libertyship46

People like you always talk as if nothing ever happened in the economy from 2001 to 2008. We had a booming economy and about 5% unemployment. There was a housing bubble created by people like Barney Frank who were determined to push houses on people who couldn't afford them, but the economy was still booming. I don't know how many people would trade the 5% unemployment we had under Bush for the 7/9% (higher, if you take the  "U-6" number of total unemployed people) we have now. Yet the Bush years were "oh so unfair," right? The Bush years were just terrible, yet it was one of longest stretches of prosperity even though we were also fighting two wars. People actually had jobs and careers, not chronic unemployment and dispair. Yes, things are SO much better now and going off the fiscal cliff will make them better, right? If you really believe that, I have a bridge to sell you in Brooklyn.

JimTemple
JimTemple

I think going over the fiscal cliff is great because it will force people to look at where we are, as a country, financially. Right now, with our debt the way it is, if we're downgraded by Moody's, the interest rate on our loans will go up.  Has anyone really thought about what a 1% interest rate increase is on $1.5 trillion?  Do the math, y'all, it aint pretty.

Gooms
Gooms

All you need to know about this article is a description of the institute the author is associated with: "The Roosevelt Institute is a progressive non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt by developing progressive ideas and bold leadership in the service of restoring America's health and security".Nuf' said.........

skandiarecluse
skandiarecluse

RE: "It sounds like an impending disaster, but in reality, we’ll wake up on the morning of Jan. 3 and life will be unchanged."

Jump off the top of the Empire State building...as you pass the 100th floor "so good so far, we're flying man",

Pass the 80th floor, "Still flying Man. This is great, Like a bird"

Pass the 60th floor singing 'Free Falling'

Pass the 40th floor singing 'Kumbiyah M'Lord, Kumbiyah'

Pass the 20th floor " It is just like Inception, man, look at those cars get BIG. This is great!"

Pass the 10th floor . . . . .singing "I'm a believer"..

MaureenSteele
MaureenSteele

     Enough with the media scare tactics!  A nation with newly recognized great wealth of natural gas along with high petroleum production and low taxation is well positioned to successfully address it's debt!

AnnRowe-Fisher
AnnRowe-Fisher

the states have until December 14th, 2012 to not have Obama care in their state!  It was an a little more time to get their shit together!  Most Republican Governors will probably say NO!!  Remember some will face re elections in 2014!!  Individuals should have a right, though!  When your employer does not give benefits and you make too much to get food stamps, Obamacare would be a blessing!  Think part- timers!

kurtbrindley
kurtbrindley

To me, taxing people for their effort, their production, for their contributions to society is insanely schizophrenic. The only sane way is taxing their consumption. Find a way to make it progressive and tax us for what we spend, not earn. Bring some sanity to this country.

AlanMacDonald
AlanMacDonald

The scare term, "Fiscal Cliff", and the phony solution, "Tax Reform", are both "Shock Doctrine" propaganda bythe Empire, and the ONLY real solution is "Wealth Reform" (as similar to'Land Reform' to free-up monopolized resources for constructiveinvestment and productive/humane use).  

Best luck and love to the fast expanding 'Occupy Empire' educational and revolutionary movement againstthis deceitful, guileful, disguised EMPIRE, which doesn't wear RedCoats, Red Stars, nor funny looking Nazi helmets --- yet.  

Liberty, democracy, justice, and equality

Over 

Violent/Vichy II  

Empire,  

Alan MacDonald Sanford, Maine    

BTW, the author, Mark Schmitt in "Time" does a credible job in explaining the false scare of the 'Fiscal Cliff', but, there is only "One Thing" to watch ---- the exposure of EMPIRE

akpat
akpat

All those who come up with the old clitchet of tax everyone and the people who dont pay tax simply dont seem to understand there is no point in heavy taxation on people who cannot afford it only to give it back as welfare. Whats needed is to broaden the tax bash with jobs that pay enough for people to be able to live and pay taxes.

To fix the budget requires annual decreases of 50% in the military, 50% in non SS/med 'entitlements' and a 100% decrease in pork, and after that raise taxes on the wealthy, imports and corporations.

The other alternative is for the rich and wealthy along with corporations to manufacture here and take a little less profit.

leftofleft
leftofleft

EXACTLY!  The automatic tax increases and cuts in spending are just what the doctor ordered.  Washington will never agree on such an appropriate approach by year's end.  The cuts in defense spending are past due.  We've spent billions chasing people around the middle east who are armed with nothing more than a fifty year old machine gun.

(By the way, Obamacare was passed using reconciliation.  When does it expire?)

JohnPatterson
JohnPatterson

Real tax reform begins by broadening the tax base.  The fact that almost half of US workers don't even pay Federal ncome taxes is a huge problem for ALL taxpayers, because if you don't have skin in the game, then it's always someone else's problem.  It doesn't have to be much of course, but it needs to be something.