HICKS: Thelma and Louise approach the fiscal cliff

November 17, 2012

The spirit of compromise survived less than 24 post-election hours. By then, House Republicans ruled out any tax increase, and the president called for a tax hike for the rich. I think this is increasing evidence that we will come very close to the so-called fiscal cliff. In fact, that may be the best compromise that can be worked out in D.C. Let me explain.

Generally, one side of our body politic wishes to shrink the size and scope of government and the other wants to expand its reach and powers. Neither side has done a sufficient job in persuading a sizable majority that it is right (although, to be fair, one side has huge short-term advantages by handing out Scooby snacks).

Reaching an agreement on our budget deficit requires one or both sides to concede central parts of their arguments. That could have huge consequences on the political economy of future elections, so there’s not much compromise on the wind.

The spending cuts of the fiscal cliff will be far less broadly injurious than most suppose. That is simply because there is a lot of fat to cut before it becomes painful. The one exception will be a collapse of defense acquisitions, which will pummel many communities. Taxes are the big issue.

Republicans have vowed not to raise taxes. They argue with factual accuracy that the Bush tax cuts made the income-tax system more progressive and that a significant share of high-income earners are actually small companies that do not pay corporate taxes. They also contend, with less empirical support, that higher taxes on these groups will stall the economy.

Higher tax collections and (worse still) higher rates will slow the economy, but they won’t kill it.

Democrats want to eliminate the Bush tax cuts, but only on the rich. They have demonized the tax cuts, but in reality Democrats are terrified of a complete repeal—as they should be.

The end of the Bush tax cuts will increase by a third the number of households that pay income taxes. This group consists of households earning roughly $30,000 to $50,000; members compose more than one in five voters and overwhelmingly supported Obama in the last election (57 percent to 42 percent).

The fiscal cliff also restores the pre-stimulus Social Security payroll taxes of 2 percent of earnings. Altogether, this means a household earning $40,000 would see a tax hike of nearly $2,000 beginning Jan. 1, 2013. High-earning households will pay much more like opponents claim, but as a share of income, the repeal will clobber middle-income households.

I would like to see wholesale tax and entitlement reform. That means more revenue, but through a cap on loopholes and deductions, a lifetime limit on most entitlements, and later retirement age for young workers. I am not betting on it, though; I suspect we’ll drive off the fiscal cliff, just like Thelma and Louise.•


Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.


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