Fiscal cliff deal: What we need
But what Congress and the White House can do now is solve the cliff dilemma in a way that provides a down payment toward reducing the 2013 deficit on both the spending and tax side, while also paving the way to a Grand Bargain by a date certain next year. And both Republicans and Democrats can achieve all this while saving face if they step away from their rigid partisan and ideological stances. Here are some examples of how it can be done:
The fiscal cliff solution could involve specific spending cuts, including a portion of the automatic defense and other spending cuts now in place. It could allow the payroll tax cut to expire. And it could enact measures to increase the effective tax rates — reflecting the taxes that people actually pay — for those making more than a stated threshold (e.g., $250,000), without boosting marginal income tax rates. For example, Congress could allow an increase in the capital gains rate and tax on dividends to 20-25 percent for anyone whose income exceeds the stated threshold.Continue Reading
Congress could also limit the tax expenditures for those above a certain level of adjusted gross income — say, $500,000 — to include only the two large ones that, due to the Alternative Minimum Tax (AMT), are available to upper middle class taxpayers: the deductions for interest paid on a primary residence and charitable contributions. This approach would save face for Democrats by raising taxes on the wealthy, and for Republicans by avoiding an increase in marginal income tax rates. Other tax rate increases and larger spending reductions would be deferred until a set date in 2013.
If the parties agreed to measures like those above, we would achieve a deficit down payment in 2013, while being able to avoid larger tax increases and spending cuts for enough time to achieve a Grand Bargain. Congress could also increase the debt ceiling limit to a level that would likely expire at or around the same date. As a result of these simultaneous steps, the relevant committees in Congress could be instructed to come up with legislation to form the basis of a Grand Bargain by the applicable date in 2013.
There are two other critical considerations — and that is what the goal should be for a Grand Bargain and what type of fail-safe should be triggered if agreement is not reached by the stated dated. Some see this goal as a certain amount of deficit reduction. But this is a poor criterion because budget baselines are so easily manipulated. Instead, I suggest the goal should be to enact legislation that would reduce debt as a percentage of the economy to 60 percent by 2024, with specified spending reduction and revenue increase targets and appropriate interim milestones. In addition, if a deal is not reached by the stated date, then a predetermined ratio of temporary tax surcharges and spending reductions to both mandatory and discretionary spending could occur to hit the milestone target.
We can avoid the fiscal cliff in 2012 and achieve a Grand Bargain in 2013 if the American people demand leadership as well as constructive and principle-based compromise from our elected officials in both political parties. The stakes are high and the risks very real, and yet the rewards will be great if we are successful. It’s time for results not rhetoric.
David Walker, Founder and CEO, Comeback America Initiative, and former Comptroller General of the United States.