http://ideas.time.com/2012/11/13/viewpoint-why-we-should-go-over-the-fiscal-cliff/
The fiscal cliff is a powerful metaphor. It sounds like an impending disaster, but in reality, we’ll wake up on the morning of Jan. 3 and life will be unchanged. Sure, tax rates will nominally be higher, some tax breaks will have been canceled, and the government will be expected to implement major cuts in military and domestic spending. If that continues for several months, it will have an adverse effect on the economy.
But letting the law take effect will also have some real benefits. For one thing, on the other side of the cliff, we’ll be a big step closer to the kind of fundamental reform of the tax code that both Democrats and Republicans say they want. Two provisions that limit the deductions and personal exemptions the wealthy can take — similar to the cap on deductions proposed by Mitt Romney — will come back into effect. Capital-gains rates will rise from 15% to 20%, and dividends will be taxed at normal rates, reducing the incentives for tricks like the notorious carried-interest loophole. And instead of a tax system that produces less revenue as a percentage of GDP than at any time since 1950, we’ll move toward one that is adequate to the needs of a modern, dynamic economy. The fiscal cliff is, all by itself, a budget deal and a step toward tax reform. A flawed and dangerous one, to be sure, but a far better starting point for a real budget agreement than the temporary rules of 2012.
Greenspan: Recession a
There’s no point denying it, says Alan Greenspan: the tax increases that will come with any solution to the fiscal cliff will hurt economic growth. And that’s fine with him, if it means finally dealing with the U.S. budget deficit.
“If the cost of getting out of this is a modest recession, I think that is a cheap price,” Mr. Greenspan, the former Federal Reserve chairman, said at a conference in Washington on Friday.
Now, to be clear, Mr. Greenspan is no fan of raising taxes. He said the U.S.’s budget issue is fundamentally about spending. Even raising the rates of the wealthiest is problematic. The rich save the most, and savings are the basis of economic growth and productivity gains because they support business investment. Mr. Greenspan says that as government spending increases, saving decreases. For the former Fed chief, that explains why U.S. growth and productivity are starting to lag.
But his reluctant embrace of tax increases is a recognition of the politics of government fiscal planning. Voters view Medicare, Social Security and other entitlement programs as just that – entitlements, akin to a contract. Tax policy is less rigid. The public is used to watching their taxes rise and fall.
That makes altering the tax code an easier path in the short term. Spending must be brought under control, but that will be harder. So, says Mr. Greenspan, raise taxes now and lower them again when the budget deficit is brought under control.
