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Avoiding the looming fiscal cliff

BY DI EDITORIAL BOARD | DECEMBER 13, 2012 6:30 AM

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In fewer than three weeks, if Congress does not take action, a massive conglomeration of indiscriminant spending cuts and tax hikes will begin chipping away at the slowly recovering economy. The January “fiscal cliff” is looming, with potentially massive consequences for the American economy and political climate.

The Daily Iowan Editorial Board, similar to so many others, believe that a short-term deal must be reached so that the economy does not slide back into recession next year. But we also believe that Congress’s bad habit of kicking unpalatable decisions down the road is no longer viable; real efforts at long-term tax and entitlement reform should be on the table once the “fiscal cliff” has been averted, and the public should hold Congress accountable if a long-term solution is not reached. If no deal is reached by Jan. 1, a few things will happen immediately, but their effect will not be felt right away.

First, more than $100 billion in government spending on both defense and non-defense programs, such as Medicare, will go into effect for 2013. These mandatory cuts were put into place after the 2011 debt ceiling fight in Congress to spark the creation of a long-term deficit-reduction plan — no such deal was ever struck, and so we are left facing the punishment.

Second, the 2001 and 2003 Bush tax cuts, the payroll-tax cuts, and the Obama era expansion of the Earned Income Tax Credit will expire, raising taxes by more than $3,400 on the average American next year, according to a report by the Tax Policy Center. Wealthy Americans — for whom the Bush tax cuts were disproportionately beneficial — would see the largest tax hikes; the top 1 percent of earners would see their federal tax rate go up by more than 7 percent.

Third, as a result of the massive, arbitrary cuts to government spending and the steep tax increases (combined with the downturn in financial markets that would likely follow), the U.S. economy would plunge into its second recession in five years. The Congressional Budget Office predicts that, if nothing is done to stop the fiscal cliff, the American economy will contract by 0.5 percent in 2013, and unemployment will jump back up over 9 percent.

Given the myriad disasters that could be caused by failing to act on the fiscal cliff, it seems obvious that policymakers should act swiftly to avoid recession. Virtually everyone agrees that something needs to be done, but President Obama and the Democrats have a very different plan to stop the fiscal cliff from hitting than the House Republicans, and the two sides do not have a history of compromising.

Basically, the debate surrounding the fiscal cliff fix is about how best to fix the American budget deficit. Obama and Congressional Democrats proposed a fix that would raise $1.6 trillion in new tax revenue mostly by letting the Bush tax cuts expire for the nation’s top earners and would cut government spending by $400 billion. The Republicans have offered a plan that raises $800 billion in new tax revenue but maintains the Bush era tax rates, $1.2 trillion in domestic spending cuts, and $200 billion in slowed growth in Social Security.

These proposals were merely opening offers in what will be a tense negotiation; it is safe to assume that the final deal will not look much like either plan, and that’s a good thing. A fair solution to the fiscal cliff should not attempt to balance the budget on the back on any one group. Ultimately, the American tax code will have to be reformed — the wealthy will have to give up the massive tax break they have enjoyed for the past decade — and social programs will have to be pruned to some degree.

But, given the systemic change necessary to combat the deficit, the final weeks of December are an not an appropriate time to discuss long-term tax and social program policy. Congress should pass a stopgap bill that extends most of the tax breaks and stops the mandatory spending cuts to spare the country a recession and then focus on reasonable long-term reform to curb the deficit with the knowledge that — this time — the public will not tolerate failure.


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