David Leonhardt has a good piece up at the NYT on, among other things, the contractionary impact of the fiscal time bomb set by the expiration of all the Bush tax cuts, the activation of the sequester cuts, the AMT biting a lot more taxpayers, and the end, yet again, of the payroll tax break and the UI extension.
Alan Blinder takes you through the math and politics here—both are ugly. Everyone uses the “kick the can down the road” analogy both re what got us here and what’s likely to happen next. I agree, but I’d add an ‘s.’ That is, what’s happening now is the accumulation of numerous canS that have all been kicked down various roads all coming together at the crossroads on December 31st of this year. We could “fall down on our knees” like Robert Johnson, but we’d still be looking at a recessionary contraction of 3.5% of GDP, according to Blinder, and the unemployment rate, according to CBO, would reverse course and grow to above 9% next year (see last figure here).
Most of the speculation I’ve seen is that the cans get another kick, always the safe bet with this Congress. But it’s also important to think about what should happen. Oftentimes, plan beats no plan.
Of course, as many have stressed, “nothing” in this case is really something. If your main concern is deficit reduction, economy be damned, an almost $600 billion reduction in the deficit in 2013 may be just what you’re looking for.
I suspect, however, that you’ll be disappointed, and with respect, I’m glad. I don’t want to head back into recession, and if you consider the fact that pretax, middle-class incomes haven’t gone much of anywhere for more than a decade, this is an especially lousy time to hit the middle with a tax increase.
So here’s my plan:
—Allow the sun to finally set on the high-end Bush cuts. The top 2% of households are much less income constrained than the middle class, so I’m not worried about the impact of this increase on the economy/recovery. If we have to agree to a phase out, so be it, but let’s not let them drag on much longer.
—Set up a gradual phase out, conditional on the unemployment rate (or maybe on the growth of median household income) for the rest of the Bush cuts, with some minor exceptions. It make take years to get back to low unemployment, or for middle class incomes to start to grow again in real terms, so this may be a slow phase out, but that’s fine. Near and even medium term deficits are not a threat, especially if we design a real path back to fiscal sustainability that includes new revenue like this. We can’t get on that path solely on the $250K+ increases (though they’re the right place to start), and remember, the last time the middle class actually got ahead economically was during the Clinton years, which is basically the tax structure we’d be phasing back to here.
The exceptions, by the way, should be the expanded Child Tax Credit and Earned Income Credit from the Recovery Act. They’re helping the least well-off among us, provide good bang-for-buck, and should be made permanent (at around $10 billion a year, that’s money well spent).
We should also permanently index the AMT, but if another patch is all we can do this go-round, so be it.
—Unemployment Insurance extension and the payroll tax holiday should phase out depending on the economy. Assuming the economy is trucking along about like it is now, we ought be able to schedule their demise—probably not in January of next year, but maybe in the second half of the year.
—Suspend most of the automatic spending cuts and instruct Congress to spread them over more years with no further cuts into non-defense discretionary (NDD). There’s just a lot more work to be done here and the across the board slashing has reached a terribly damaging fever pitch. A pox on both their houses—I don’t like to hear the President promise to take NDD spending down to its lowest level since the early 1960s as a share of GDP–why, oh why, is that a laudable goal? But the real insanity occurs in the House R’s budget, where they essentially take NDD spending down to zero.
Of course there are savings to be found throughout the budget—I’ll try to write more about them in coming days. But the fact that discretionary spending is and has been the only thing on the table, and that R’s are going to continually try to protect defense, thus pushing more cuts onto the non-defense part of the discretionary budget, this is an unacceptable starting point. For example, spending through the tax code—the $1 trillion or so in tax expenditures each year—must also be in this mix.
Like I said, more to come, but I think this is the beginning of a plan.