The Politics of the “Fiscal Cliff”
Printer-friendly versionPDF version
a a
 
Type Size: Small
The Fiscal Times
July 13, 2012

By now, almost everyone knows that under current law a large “fiscal cliff” faces the economy on January 1, as a number of temporary tax cuts expire and automatic spending cuts take effect. The deficit would fall by about $550 billion next year if all these measures take effect, but both parties are reluctant to permit this to happen.

Neither party has precisely spelled out its objections to the fiscal cliff. Democrats seem concerned mainly about the rapidity of the deficit reduction because they ascribe to Keynesian economics, which says that the budget deficit is stimulative under economic conditions such as those we have now—low growth, inflation and interest rates; high unemployment and sluggish aggregate demand.

Therefore, reducing the deficit sharply before the economy returns to health will be depressing, economically. Democrats point to the economic stagnation in Europe, where deficit reduction has been implemented to a greater extent than here, and the example of 1937, when Franklin D. Roosevelt cut the deficit sharply and the economy immediately went into a tailspin.

Republicans claim to be enthusiastic about deficit reduction, but appear only willing to accomplish it by cutting domestic spending. They oppose cuts in defense spending for both economic and security reasons, not to mention the impact on defense contractors — whose political contributions overwhelmingly go to Republicans.

They are also strenuously opposed to any tax increase for any reason. Republicans have long said that the tax cuts of the George W. Bush administration should be made permanent—even though they themselves originally enacted them with expiration dates. However, they are open to letting the temporary cut in the payroll tax expire, since they don’t believe that tax cuts for working people have any stimulative effect; only tax cuts for the ultra-wealthy are stimulative according to Republican doctrine.

Therefore, the greatest Republican concern is that tax rates on the wealthy will increase. Under Bush, the top statutory income tax rate fell from 39.6 percent, where it was throughout the economic boom of the 1990s, to 35 percent in 2003. Even though there is no evidence whatsoever that this tax cut had any stimulative effect, Republicans dogmatically insist that tax rates on the wealthy should not only not be permitted to rise, but must be cut further.

Mitt Romney would cut the top rate to 28 percent along with a number of other tax cuts for the rich and for big corporations. Relative to current law, the Tax Policy Center estimates that a third of the benefits of the Romney tax cut would accrue to the top 1 percent of households, with half of that going just to the top 10 of the top 1 percent (0.1 percent).

He has repeatedly said that his tax cut would not raise the deficit because tax loopholes and shelters would be closed to recoup the revenue loss. However, Romney has steadfastly refused to name a single tax loophole he would get rid of.

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.