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Could the Fiscal Cliff Be a Good Thing?

Tuesday, November 13, 2012

Fiscal-Cliff-Ahead

The entire discussion of the “fiscal cliff” has things a bit backward.  People talk of “going off” the fiscal cliff — and the natural image is of the disaster that awaits one who tumbles from the edge of a precipice.  Instead, perhaps we should say “running into” the fiscal cliff — the cliff being a force that stops a tumble.

The term “fiscal cliff” refers to the combination of two major policy changes due to go into effect in January 2013:

  1. The sequester. Because the (not-so-)Super Committee succumbed to partisan paralysis and couldn’t come up with anything better, the sequester will begin making automatic spending cuts across domestic discretionary (50 billion per year) and defense (50 billion per year) programs.
  2. The Bush and Obama tax cuts expire. The Bush tax cuts increased the deduction for children, cut marginal tax rates, and cut dividend and capital gains tax rates.  The Obama tax cut reduced the amount workers pay for Social Security without reducing benefits.  In addition, a Medicare “doc fix,” which increased reimbursements for hospitals, is due to expire.

Running into a cliff isn’t fun.  It would raise nearly everyone’s taxes.  It would cut spending on most of the programs everyone uses.  It would temporarily raise unemployment rates.  But the fiscal cliff would back us away from a true disaster scenario, and it would slow the growth of the government debt.

Moreover, the fiscal cliff is an enormous opportunity for House Republicans.  If they simply allow it to occur, they win big politically in the negotiations.  They will get credit for fiscal responsibility, while the Obama administration will get the blame for the tax increases and will lose the leeway to offer new giveaways to its constituencies.

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