You’ve probably heard the old joke — It’s not the fall that kills you, it’s the sudden stop. The “fiscal cliff” facing the nation’s economy is a lot like that. But it’s no laughing matter.
In a deal reached in August 2011 President Obama and Congress mandated a series of spending cuts and tax increases scheduled to take effect January 1, 2013. Over time, as the Herald Editorial Board has advocated, putting the nation’s fiscal house in order must be done by cutting spending and increasing revenues.
But there’s a right way and a wrong way to go about it. The looming combination of mandated spending cuts and revenue increases is a crazy way. It’s a blunt instrument that hurts the economy more than it helps. Here’s why:
Sequestration. This is Washington-speak for the mandated spending cuts. Miami-Dade County and all communities in Florida would be among the hardest hit. Everything from schools to affordable housing to day-care and after-school programs for children, literacy programs and water-purification would feel the impact.
These reductions would be part of the $65 billion across-the-board cuts for the last nine months of fiscal year 2013. Some areas would be hit much harder than others. Jobseekers in Florida, for example, have already seen an average 31.2 percent cut in the number of weeks they can receive unemployment benefits, and they would undoubtedly be hit again.
Tax increases. This is the revenue part of the bad deal, with about 90 percent of taxpayers affected. The typical household tax bill would rise by about $2,000. Taxes on the highest earners would rise by an average of $121,000.
This is where the sudden stop comes in. The combination of spending cuts and a host of tax increases would amount to some $500 billion, equal to about 3 to 4 percent of the gross domestic product. Aside from weakening the social fabric and affecting everything from air traffic control to bridge building, road maintenance and education, it would be too much deficit reduction, too quickly, for a fragile economy.
The Congressional Budget Office and most experts agree that it would push the economy back into recession.
The fiscal impasse between Congress and the president involves tax increases, especially the Bush tax cuts scheduled to expire Dec. 31. Republicans oppose letting the top rate revert from the present 35 percent to the 39.6 percent level that existed under President Clinton, when the economy soared. Go figure.
Eliminating all tax breaks for the top 2 percent of households would raise about $2 trillion over 10 years, more than the $1.6 trillion the White House wants.
Republicans say they can raise revenue simply by closing unspecified tax loopholes (the mortgage deduction, for example), but that would require getting rid of virtually all tax breaks. That is impractical. “The math tends not to work,” Mr. Obama said.
He’s right. Mr. Obama campaigned on an explicit pledge to end the Bush tax cuts while keeping taxes level for earners under $250,000. Most voters agree.
Congress and the president should come together on a combination of tax increases for top earners and gradual spending reductions. Spending cuts should be strategic — for instance, capping the mortgage deduction so that there’s still an incentive for home ownership but not a giveaway for mansion-seekers. The point is to not hurt a fragile recovery while ensuring everyone sacrifices a bit to strengthen the economy.