In February 2003, 450 economists, including 10 of the 24 living Nobel laureates in economics, made a public plea to President George W. Bush not to enact the recent tax cuts passed by Congress. These tax cuts, officially called the Jobs and Growth Tax Relief Reconciliation Act of 2003 but forever known as the Bush-era tax cuts, would not do what they promised, the economists argued. Instead, they said, the cuts would “worsen the budget deficit, increase inequality, decrease the ability of the U.S. government to fund essential services, while failing to produce economic growth.”
In the nearly 10 years that have elapsed since that plea, the budget deficit has ballooned, the gap between the wealthy and the middle class has expanded, and the American economy has spiraled into the greatest decline since the Depression. History has proved the 450 economists were correct. On Dec. 31, these same Bush-era tax cuts are set to expire. This, we are told in hushed or hysterical tones, could push the American economy off a “fiscal cliff.”
Am I missing something here? Can letting a failed tax policy die be such a bad thing?
Not really, says the Congressional Budget Office. In fact, if we let these tax rates expire, the debt would rise but the increases would be reduced by more than $7 trillion, or 70%, over the next 10 years. This reduction in the deficit would happen so fast, the CBO writes, that the gross domestic product could slow in the first six months of 2013 to 0.5% — probably causing a recession — before catching its breath in the second half of the year and starting to return to a respectable 2.4% growth.
On the other hand, the CBO warns, if Congress extends current policy, the deficit and debt will increase, slowing the economy in the long run and dramatically increasing interest costs.
Because of the deal Congress and the president made last year, letting the current tax rates expire will result in across-the-board budget reductions in many government programs (the dreaded “sequestration”). Still, there would be no decreases in Social Security, Medicaid and veterans benefits. Medicare could take a 2% hit, but it’s unclear that it would affect individuals’ benefits. Defense spending would take a big hit, but because of the wind-down in Afghanistan, some military leaders are actually asking for less than Congress is willing to shell out. Also, reduced military spending does not mean a weakened national defense. In the decade 1990-99, defense spending decreased by 1% a year.
So who’s behind all the “fiscal cliff” saber-rattling? Big earners and their friends, who despise the idea of the top tax rate going up from 35% to 39.6% (where it was during the 1990s, one of the most prosperous decades in this country’s history), and any changes in the low, low, low capital gains tax. They started their scare campaign in February by calling the Dec. 31 deadline “taxmaggedon,” which was clumsy and passe on arrival. It took that wordsmith Federal Reserve Chairman Ben Bernanke to coin “fiscal cliff,” and even though it’s more like a fiscal hill or a fiscal hurdle, the media loved “cliff.” Besides, by summer we had a presidential election to fill the talk shows, and neither major candidate was talking about cliffs.
So will Congress pass a comprehensive bill by New Year’s Eve to avoid the fall from the fiscal cliff? In a pig’s eye. What’s much more likely is a weak agreement to continue the current tax cuts, kick the can down the road and let the next Congress figure it out.
Here’s another idea: Let’s join hands and walk to the bottom of the cliff together. It’s not very far down. The deficit and national debt will be reduced; Social Security, Medicaid and, for the most part, Medicare will go on unharmed; America will go back to tax rates that worked better than the cuts we’ve been living with; and Congress will actually be forced to do something for a change: Republicans and Democrats will have to work together to repair those programs damaged by sequestration, rather than filibuster or chant talking points to make their way around the hard decisions.
Perhaps America is on the brink of a fiscal opportunity.
Jack Shakely is president emeritus of the California Community Foundation.