Averting the Fiscal Cliff

Friday, 28 Dec 2012 07:56 AM

By Barry Elias

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The coming fiscal cliff was a man-made creation between the president and Congress in 2010 to postpone critical fiscal policy initiatives until after the 2012 presidential election.

As I suggested in a previous article, the key to economic recovery is for corporate tax rates to be significantly lower than personal income tax rates. This tax rate differential promotes investment in employment and infrastructure for long-term business sustainability that benefits society overall.

Greater employment increases the economic multiplier, thereby generating more income per dollar available for expenditure. This will reduce the deficit by raising incomes and tax revenue, as well as reducing transfer payments and debt service.

In addition, hiring and training tax credits can be a highly effective short-term solution to incentivize employment. The credit can be phased in at a gradually increasing rate over a fixed period of time to facilitate long-term employment and skills training. Moreover, dividends should not be taxed at the corporate level.

In return for this favorable corporate tax treatment that promotes much needed employment, high-income families would be subject to an increase in the personal income tax rate and a higher cap on Social Security and Medicare contributions.

The Gini index suggests the wealth distribution disparity in the United States is one of the highest in the world. This differential has been the result of an inordinate transfer of wealth over the past 30 years, from the lower and middle class to the upper class.

The policies that I have outlined would reduce this unjust inequality and help us avert the coming fiscal cliff. Greater access to opportunities for our society would enable a strong, sustainable economy that promotes employment, investment and income in a fair, effective and efficient manner.

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