Grim Predictions about the Fiscal Cliff II and Deficit Reduction

By :: January 8th, 2013

I spent lunchtime today moderating a thoroughly discouraging Urban Institute panel discussion on the fiscal cliff. The consensus of the speakers—all highly-regarded budget experts—was that the New Year’s cliff deal was pretty lame and the coming round of self-imposed budget crises will be even worse.

My Urban Institute colleagues Donald Marron, Rudy Penner, and Bob Reischauer—each of whom has directed the Congressional Budget Office—saw little good coming from the recent fiscal cliff drama. Bob scored the deal a paltry two out of a possible 10. Rudy felt little could come out of the next round of budget deadlines that will hit in February and March. Donald saw some benefit in the decision by Congress to make most of the tax code permanent, largely ending its recent practice of temporarily extending big chunks of the law a year or two at a time.

Donald even saw some slight prospects for corporate tax reform that raises the same amount of money as the current code, but brings rates more in line with the rest of the world. But the chances of broad-based individual tax reform in 2013 seem to be slipping by the day.

A big part of the problem is the vast gulf between Democrats and Republicans over how much revenue any new tax code should raise. The GOP insists it should be no more than 18 or 19 percent of the Gross Domestic Product, and the fiscal cliff deal already would raise that level to about 19.4 percent. Thus, it is no surprise to hear Senate Minority Leader Mitch McConnell say he is done talking about tax increases.

For their part, many Democrats see the government collecting somewhere around 25 percent of GDP in taxes. Interestingly, both Rudy (a Republican) and Bob (a Democrat) figure a reasonable level for now is probably around 22 percent. That is a nice middle-ground. But how to get there?

For a long time, budget wonks held out hope that process reform would force action. But the experience of the past couple of years seems to have destroyed those hopes. The cliff itself, which was to be the ultimate forcing mechanism, instead became something of legislative self-parody.

While journalists endlessly hyped the phony crisis (after all, it was the holidays and there was little other news) the markets yawned. This, traders seemed to be saying, is Washington politicians acting stupid again. Sooner or later, they will just duck the big issues and move on.

And so they did.

The coming crises--the expiration of the debt limit in late February or early March and the threat of a government shutdown after March 27--are more real. At least they would have significant immediate consequences. But we’ve learned that when Congress doesn’t want to address the deficit, it won’t. It will just wave away the penalties for inaction.

If lawmakers face automatic spending reductions for not reaching a budget deal, they just delay the cuts. If they face a government shutdown, they just pass another temporary spending bill that keeps the doors open. If the Treasury needs their OK to keep borrowing, they eventually give it for another few months.

Until they do it all over again.




  1. Tax Roundup, 1/9/2013: E-filing gets underway January 30. Also: 79 year-old lady pleads to tax crimes. « Roth & Company, P.C  ::  9:52 am on January 9th, 2013:

    […] Howard Gleckman, Grim Predictions about the Fiscal Cliff II and Deficit Reduction (TaxVox): […]

  2. Michael Bindner  ::  9:05 pm on January 9th, 2013:

    A few thoughts. The deal on capital gains, dividends and talk of a deal at 25% on corporate taxes gets all of this in the same ballpark. Additionally, the upper middle class tax rate is also in that range. The current status quo allows throwing out all these taxes for a VAT-like net business receipts tax (which allows deductions for social programs – like the health insurance exclusion and a simplified refundable child tax credit paid to employees and literacy trainees). You might even go for a lower rate of 22%, with a surtax of up to 22% for high income earners (anyone over the current 25% rate) and heirs (tax distributions from inheritances rather than transfer of assets). Sometimes you just have to look on the bright side.

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