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?
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.
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.