Fiscal Cliff Notes

Here’s the deal:

Tax revenues rise. Not rates – revenues. Raising rates is bad because it disincentivizes work, enterprise, and investment, and encourages tax avoidance. But rates needn’t be raised; the money can be gotten by curbing deductions, which are worth over a trillion a year. And instead of fighting a political WWIII over which deductions to kill, the better solution is to cap the dollar amount of deductions any taxpayer can take.

Romney proposed this during the campaign. It would mostly hit the rich, especially the very rich. Now, it’s true that (contrary to “Buffett rule” hogwash) the rich already pay by far the lion’s share of all income taxes; they should not be seen as a bottomless well of cash for redistribution; nor should their wealth be regarded as somehow illegitimate, deserving more taxation punitively. All that said, it’s my judgment (as a fairly rich Republican) that given the country’s fiscal situation, richer people should pay somewhat more.

And capping deductions is a particularly fit way to do that. The mortgage interest deduction, for example, encourages over-large (and multiple) houses, by forcing other taxpayers to subsidize them. The charity deduction likewise makes other taxpayers subsidize the pet causes and vanity of rich people. Capping deductions would curb these undesirable inequities while still allowing the middle class to benefit reasonably from these deductions and others.

The President is probably right that a reasonable deduction cap can’t produce as much added revenue as he advocates. But he wants too much; that should be seen as an opening bid to be bargained down. Other countries that have tackled similar budget imbalances have done it with a heavy preponderance of spending cuts over tax increases, which is better for economic health.

That our problem really lies with spending is obvious because taxes high enough to close the gap would be far too high for the economy to bear. Indeed, you could never actually raise revenues that much, because it’s self-defeating — the more you tax, the less taxpaying economic activity you have.

What to cut? Defense. Yes. A lot. We need to maintain geostrategic muscle, but the truth is that a huge part of our over-bloated defense budget contributes nothing toward our actual security. A great part of it is political patronage, keeping Congressmen sweet. Unfortunately, because whenever billions are at stake, you can’t banish politics, so it will be easier for the Pentagon to cut meat than fat. But we must try.

Social programs: benefits for the poor and disadvantaged should not be cut. I’ll say it again: we are a rich country and we can, and should, take care of the less fortunate. That’s actually only a small part of government’s social spending. It’s the much greater welfare for the affluent that must be cut.

The big pig here is Medicare. Romney also actually said that benefits for wealthier people will have to be trimmed. Yes, bless his heart, he did say it. But for social spending in general, here again you can’t get politics out of it, meaning it’s a lot easier to screw the poor than the better-off, because the latter carry so much more political weight. Yet again we must try. “Means testing” must become the watchword for all these programs – i.e., only the needy should be “entitled.” That’s the only fair way to achieve swingeing reductions; probably the only way at all.

Another point: no phony cuts, or phony pledges of future cuts. Congress is good at this game: legislating draconian cuts in, for example, Medicare reimbursement rates for doctors and hospitals, that (wink, wink) will never be allowed to actually take effect. (That was how Obamacare was seemingly transformed from a huge expense to a money-saver.)

So there’s the deal. The only possible deal; the deal that has to happen. But Obama flubbed it before. I voted against him mainly because I didn’t believe him capable of achieving it now. Let’s hope I was wrong.

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3 Responses to “Fiscal Cliff Notes”

  1. Lee Says:

    I like the idea of capping deductions. Of course there would be some details to work out. For instance, if I spend my entire income on medical care, I consider it adding insult to injury, if I am subsequently jailed for failing to pay taxes on the income I have already spent. (Though, with the Affordable Care Act and decent safety net programs, perhaps this sort of scenario is becoming irrelevant!)

    Closely related, perhaps, is the concept of phasing out deductions. New York State has something like this, though I do not recall whether deductions get phased down to 0%. If I am remembering correctly, the rule is something like: when your income gets to $x then you can deduct only y% of your deductions, where y is computed from x in some reasonable not-too-complicated way.

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