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Some Thoughts on the Fiscal Cliff
The fiscal cliff is more of a cascade – or a game of dominoes. First, the President and congressional Republicans have to make a deal on the terms for renewing the Bush tax cuts. That appears to very possible, since GOP leaders seem to have conceded that additional revenues are inevitable. So, the most basic deal to be struck is how precisely to raise $800 over 10 years from higher-income households. John Boehner can probably get his caucus to agree with those revenues, especially since the President has recently talked about raising twice that total, and so long as it does not involve a new, 39 percent tax rate. The only way to raise $800 billion without hiking the top rate is to increase instead the tax rate on capital gains, dividends and interest. So, look for a new, 25 percent tax rate on capital income for the top 2 percent – a change that will hit some 25,000 very wealthy households more than some three-to-four million well-paid professionals.
If the two sides can manage to compromise on the initial high-end tax increase, they get to move on to the next stage: Some broad understanding about how much can be cut from defense, other domestic programs, and entitlements over the next 10 years – and perhaps, how much additional revenues can be raised from business. As Republicans will have to concede more substantively on the initial, high-end tax increases, the administration will have to concede more here, especially on entitlements and almost certainly on business tax increases too. But, any broad agreement on principles should be enough to let them delay the automatic across-the-board cuts in defense and non-defense spending now scheduled for January 1.
And, if they can manage to compromise on the broad terms of a big budget deal, they get to move to stage three -- actually negotiating what to cut and by how much. As Republicans are effectively going to dictate the terms of the tax increases on higher-income people which they’ve been fighting – i.e., no new 39 percent rate – the Democrats will get to dictate the terms of the cuts in Medicare and Medicaid which they’ve been resisting. In the end, all of the changes will probably add up to less than everyone talks about today – perhaps $3 trillion over 10 years rather than $4 trillion, including the $1 trillion in cuts agreed to in the last debt-ceiling fight as well as the initial, $800 billion in new revenues. But, it will be enough to get sufficient GOP support to raise the debt ceiling in April, and the economic expansion should be able to continue on its course.