The concept of a “fiscal cliff” reflects the dysfunction in Washington. What kind of management allows so many budget challenges to remain unaddressed and then converge at one time? At year’s end, the Bush tax cuts will expire. So will the tax relief related to the stimulus package, the payroll tax and such items as research and development. Extended unemployment benefits will end, along with the “doc fix,” which has postponed lower reimbursement rates for physicians treating Medicare patients.
The “patch” for the alternative minimum tax will go away, leaving many upper middle income taxpayers vulnerable to a larger and unwarranted tax bite. The “sequester” will be launched, a $1.2 trillion package of spending cuts, split evenly the next decade between domestic and defense items.
More, the debt ceiling must be raised to accommodate spending already approved by Congress. Hard to forget the fiasco in the summer of 2011, the last time lawmakers faced the question of raising the debt ceiling. House Republicans engaged in brinkmanship that resulted in a downgrade of the country’s credit rating.
In the meantime, American voters have gone to the polls. Their choices should define the shape of the response to the approaching cliff. After the election last week, the re-elected President Obama and John Boehner, the House speaker, circled each other warily. Both applauded the idea of compromise, doing so largely as part of positioning for the coming negotiations. Boehner stressed: “Mr. President, this is your moment. … We want you to lead.”
A strong case can be made that the president has spent the past several months leading as he campaigned. Few things were more clear than his call for a balanced approach to putting the country’s fiscal house in order, a combination of spending cuts and tax increases. He spoke repeatedly about returning the top individual income tax rate to its position in the job-creating Clinton years, from the current 35 percent to 39.6 percent for households with annual incomes above $250,000.
Polling on Election Day showed that 60 percent of voters essentially agreed.
Make that element part of the plan for avoiding the fiscal cliff, and the other parts begin to fall into place, albeit with an eye on avoiding trouble for the fragile recovery. Jobless benefits can be extended, plus such items as the “doc fix,” even payroll tax relief until the economy grows stronger.
The president has committed to spending reductions advocated by the Republicans, already agreeing to a sum that would get halfway to the target of the Simpson-Bowles plan. With a deal on the revenue component, Republicans would have leverage to press for further reductions.
In their zeal to avoid income tax rate increases of any kind, Republicans have championed tax reform, erasing credits, deductions, exemptions and other breaks, arguing such a step would provide new revenue. In theory, that is true, and the country should clean up the cluttered tax code. What should be resisted is the temptation to think this would be accomplished with relative ease.
These tax breaks have formidable constituencies, from the real estate industry to charitable organizations. To be sure, the fiscal cliff is much more gradual than the image suggests, any subsequent tax relief easily made retroactive. Yet there is an urgency in the wake of the election. One step that would speed things along is agreement on the top income tax rate, pushed by the president in his re-election run and endorsed by the voters.
On Thursday, the Congressional Budget Office reported that the expiration of the Bush tax cuts for those households earning more than $250,000 a year would have a modest effect on the performance of the economy — especially in comparison to the other elements at risk in the “fiscal cliff.” Thus, the proposal passes another test. Not only would it add necessary balance to deficit reduction. It would risk less harm.