Tags: Thiessen | fiscal | cliff | over

AEI’s Thiessen: Let’s Go Over Fiscal Cliff, It Will be Good for Reforms

Wednesday, 21 Nov 2012 08:35 AM

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Lawmakers and the White House are scrambling to steer the country away from the feared fiscal cliff, but in reality, both sides should let the economy careen over at the end of this year, said Marc Thiessen, a fellow with the American Enterprise Institute.

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 push the country into a recession next year if left unchecked by Congress.

Democratic and Republican lawmakers are working to agree on tax and spending reforms to avoid the cliff, though any solution will involve measures that fail to bring about lasting fiscal reform.

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

Instead, embrace disaster and rebuild a better economy afterward as some Democrats say.

The GOP would end up looking better under such a scenario.

“Here’s an idea for how to start the New Year in a bipartisan fashion: Let’s go over the fiscal cliff!” Thiessen wrote in his Washington Post column.

“Today, the only ones in Washington who advocate fiscal cliff-diving are liberal Democrats. It’s time for conservatives to join them,” Thiessen wrote, referring to Sen. Patty Murray, D-Wash.

“Letting the Bush tax cuts expire will strengthen the GOP’s hand in tax negotiations next year, and it may be the only way Republicans can force President [Barack] Obama and Senate Democrats to agree to fundamental tax reform,” he said.

Murray told NPR recently that Democrats should use the fiscal cliff as a bargaining chip for fiscal reform, especially when it comes to raising taxes on the wealthy, something Democrats say is needed to narrow deficits.

“If the Republicans say, no, we’re going to put a little line in the sand and say the wealthiest Americans don’t have to pay any increased revenue or be a part of this solution, then we will go past the Dec. 31 deadline and begin over next year with addressing this challenge,” Murray said.

“And any package that we put out there will be a tax cut, and I think Republicans will find themselves in a real box.”

Such a move, Thiessen counters, could backfire on Democrats by wiping out tax policies they embrace.

“The 10 percent income tax bracket would disappear, so the lowest tax rate would be 15 percent. The employee share of the Social Security payroll tax would rise from 4.2 percent to 6.2 percent,” Thiessen pointed out.

“An estimated 33 million taxpayers — many in high-tax blue states — would be required to pay the alternative minimum tax, up from 4 million who owed it in 2011,” he added.

Elsewhere, the child tax credit would be cut in half, from $1,000 to $500 and would no longer be refundable for many, Thiessen noted, adding that tax preferences for alternative fuels would end, while expansions of the earned income tax credit and the dependent care credit would disappear as well.

“Letting these tax policies expire would level the playing field for Republicans in tax negotiations next year,” Thiessen wrote.

“Instead of being in a ‘box,’ Republican leaders would have leverage again — something the Democrats want and would have to make concessions to get.”

Add to that, Republicans have pledged not to raise taxes at all, and should Democrats — who control the Senate and White House — push the country over the fiscal cliff, Republicans could return afterward to hammer out new tax policies keeping true to their promises never to raise taxes.

“If GOP leaders hold the line on taxes this fall, and the Bush tax cuts expire despite their best efforts, it would not harm their reputation as the party of low taxes,” Thiessen wrote.

“But if Republicans vote proactively to raise taxes as part of a ‘grand bargain,’ the GOP brand would be irreparably damaged. Raising taxes and losing a fight to stop automatic tax increases are two different things.”

Some noted economists point out the U.S. economy will feel the effects of the fiscal cliff, as even a deal would involve some tax and spending reforms.

“Even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming fiscal cliff, spending cuts and tax increases will invariably lead to some drag on growth in 2013 — at least 1 percent of [gross domestic product],” New York University economist Nouriel Roubini wrote in a Project Syndicate column.

Stocks could suffer as a result.

“Price-earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low. With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly,” Roubini wrote.

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

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