Thursday, November 29, 2012

Deficit Agenda for Obama's Second Term

Obama's re-election is not the end of the world, studies of ancient Mayan calendars notwithstanding.  The Republicans have an opportunity to get their act together in ways that will both improve the country and put themselves in a better position to win future elections.

The so-called fiscal cliff is the first opportunity to shape future policy to their favor.  The Democrats are going to want taxes now in exchange for spending cuts later, which will never come.  The Republicans can easily outflank on this issue.  Offer some revenue increases that also simplify the tax code, but demand spending cuts now.  The following graphic shows why.
Graphic from Senate Budget Committee, with modifications by author.

A majority, but not all of the problem, with the federal budget's current unsustainable path accrues to spending that is too high by historical standards.  The debate on the issue of the debt has trended towards the position that the deficit is high and unsustainable and away from Paul Krugman's fantasy that we shouldn't worry and should be spending more money.  Republicans should take the position that spending cuts are needed now, and that simplifying the tax code by eliminating so many credits and deductions will increase revenue by increasing growth as well as from the additional revenue from fewer loopholes. Benefits of this approach:
1. Appearing "reasonable" by putting revenue on the tabe.
2. Moving towards tax code simplification.
3. Setting the stage to demand spending cuts now as a result.
No spending cuts = no deal.

I think the fiscal cliff has the potential to harm the economy due to the massive income tax rate increases coupled with the payroll tax being restored to its historical trend, all at once.  The only silver lining would be the automatic cuts to the federal budget.

My next post will look at immigration reform.  Blogging will continue to be sporadic until work and school calm down.

1 comment:

  1. Embrace Bowles-Simpson? Far from perfect, it's a step in the right direction, and tactically speaking, it would put the President and Democrats on the defensive.