Tags: El-Erian | tax | loophole | cliff

Pimco’s El-Erian: Fiscal Cliff Deal Must Take Balanced Approach to Tax Reform

Wednesday, 14 Nov 2012 07:57 AM

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Lawmakers must agree that a blend of tax hikes and an end to tax loopholes can steer the country away from the fast-approaching fiscal cliff and resist calling too much for one or the other, said Mohamed El-Erian, CEO of fund giant Pimco.

At the end of this year, the Bush-era tax cuts and other benefits are scheduled to expire at the same time automatic cuts to government spending kick in, a combination known as a fiscal cliff that could send the economy sliding into a recession next year if left unchecked by Congress.

One sticking point lies in taxes, with Democrats arguing for higher taxes on the wealthy to help narrow deficits, with Republicans countering that tax breaks should be extended for all but add that closing certain loopholes could increase government revenue needed for improved fiscal health.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Think outside the Beltway, El-Erian said.

“The problem is that we’re being pushed into these corner solutions,” El-Erian told CNBC.

“If we are going to solve this, first we have to act on the base, which means extending the [tax paying] base and removing distortions,” he added.

“The math also tells you we have to do something with the rates, so I think it’s a combination of both, and it’s important because this is a down payment to what really has to come later, which is much more fundamental fiscal reforms.”

Demand for U.S. government debt has surged amid mounting fears the country will roll over the fiscal cliff, with yields on the 10-Year U.S. Treasury falling as investors rush to the bond as a safe-haven play.

A bond’s yield falls when its price rises.

“There’s a renewed sense of despair over the fiscal cliff,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., according to Bloomberg.

“There are more rumblings out of Europe. Those concerns have put the flight-to-quality trade back into the market.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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