Republican congressional leaders and President Obama sharply disagree over how to deal with the impending “fiscal cliff.” Negotiations among Democratic and GOP lawmakers will be tough. But averting the cliff and putting the nation on a sustainable fiscal course shouldn’t be that hard.
A reasonable framework could be agreed to now, with the details worked out in 2013. Such a scenario includes a balance of spending cuts and new revenues, most of which are consistent with the recommendations of a variety of bipartisan groups and priorities articulated in the recent election.
Here are six ways Washington can avoid the “fiscal cliff.”
A reasonable framework could be agreed to now, with the details worked out in 2013. Such a scenario includes a balance of spending cuts and new revenues, most of which are consistent with the recommendations of a variety of bipartisan groups and priorities articulated in the recent election.
Here are six ways Washington can avoid the “fiscal cliff.”
James Dresch, of MND Partners Inc., works on the floor of the New York
Stock Exchange Nov. 7. Renewed efforts are under way in Washington to
resolve the impending 'fiscal cliff.' (Henny Ray Abrams/AP)
1. Extend all tax cuts except those for millionaires
President Obama
and Congress must first extend all of the Bush-era tax cuts except
those affecting millionaires. Individuals and small businesses with
annual incomes of more than $1 million can afford to pay a little more.
Those
with incomes above $250,000 can also afford to pay a little more, but
Mr. Obama should be willing to extend their tax breaks. Compromise
demands a little give here on a Republican priority. Democrats will like
that the truly wealthy will be required to pay higher taxes, while Republicans should like the fact that most of the Bush tax cuts are extended.
2. Fix the Alternative Minimum Tax and cap deductions for the wealthy
Everyone agrees Congress should fix the Alternative Minimum Tax.
It originally applied to wealthy earners to limit deductions and expand
taxable income, but because it hasn’t been adequately adjusted for
inflation, more and more middle class families are being affected by it
as well.
In addition, we should cap deductions for those with
incomes above $250,000, either with a hard dollar cap such as $35,000 or
at a 28 percent rate. At a 28 percent rate, a $1,000 deduction that
would normally reduce one’s tax bill by $350 would instead be worth a
little less: $280.
This
limits backdoor spending through the tax code but doesn’t threaten any
particular deduction. It raises revenues from the wealthy, a key
Democratic priority, without raising rates.
Congress and Obama should agree to enact these two tax provisions now but implement them in 2014 so as not to undermine a fragile recovery.
3. Cap federal health-care spending
Washington should strengthen the Affordable Care Act provision that calls for the growth of Medicare
spending per capita to be no faster than the growth of GDP plus 1
percent. As part of the push to curb health-care spending, lawmakers
should also redouble efforts to improve the delivery of care so that
Americans get better value for their health-care dollars.
They
might call for a value-added or national sales tax earmarked for health
care if the cap on federal spending is exceeded at the end of the
decade. In the end America can only have the health care it is willing to pay for.
4. Raise retirement age and use means testing for Social Security and Medicare
To rein in entitlement liabilities, Congress should gradually raise the retirement age for both Social Security and Medicare.
This should include an exception for those who have worked in
physically demanding jobs or whose lifetime earnings have been low.
Policymakers can also use means testing, asking more affluent seniors to
pay higher premiums or accept less growth in their Social Security
benefits down the road.
As part of these reforms, Washington
could also update cost-of-living adjustments for both taxes and
spending to more accurately reflect inflation. Democrats should like the
fact that lower-income seniors are protected, while Republicans should
be pleased with these efforts at entitlement reform.
5. Replace sequester spending cuts with more sensible reforms
The 2011 Budget Control Act dictates automatic – and devastating –
spending cuts of $1.2 trillion that will take effect beginning next year
unless Congress and the president take action to avert this sequester.
Congress should vote to repeal the sequester and replace the cuts with
more sensible ones, such as limiting farm subsidies and reining in
health-care costs more.
Discretionary
spending has already taken a big hit and is not the primary source of
our fiscal problem. Reallocations and reforms within this category are
needed, but current levels of already-capped spending are barely
sufficient to keep the country strong, both militarily and domestically.
Domestic spending programs such as education, infrastructure, research,
and those targeted at lower-income families should be preserved.
Democrats will be pleased these programs are spared from drastic cuts, while the GOP will be relieved that the defense budget can avoid the sequester’s ill-considered ax.
6. Eliminate the statue that requires Congress to approve debt-ceiling increases
To avoid another dangerous debt-ceiling showdown, lawmakers need to
repeal the statute that requires Congress to approve increases in the
debt ceiling. They should replace it with a provision that requires
automatic across-the-board spending cuts whenever spending exceeds the
historical average of about 20 percent of GDP. That figure should also
be adjusted by the Congressional Budget Office for demographic and economic trends that no one can control and for allowable increases in health-care spending.
This
ensures that spending is kept under control, but recognizes that an
aging population is going to necessitate that spending on seniors rise
somewhat if we are to prevent the kind of damaging cuts to other
programs that undermine economic growth and societal well-being.
The
public is willing to pay higher taxes but only if they are assured that
these are needed to reduce the deficit, not pay for a much bigger
government. And placing limits on spending is a top GOP priority.
Eliminating
the debt-ceiling rule is critical to allowing both parties to move
forward without worrying about a new crisis every time the current
ceiling expires. Leaving this vehicle in place just guarantees more car
wrecks down the road. The current debt statute is an anachronism. Its
primary function is not to rein in spending – since this is spending
that Congress has already authorized – but rather to hold the economy
hostage to one party’s demands.
Whatever the fiscal cliff’s economic consequences, they are not nearly as bad as a default on our debt.
Isabel Sawhill co-directs the Budgeting for National Priorities project at the Brookings Institution in Washington. She served as an associate director of the Office of Management and Budget from 1993 to 1995 during the Clinton administration.
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