Fiscal Cliff 'downpayment' may be in the works
Apaprently, talks to resolve the fiscal crisis are not going very well so lawmakers are contemplating going to Plan B: negotiating a "downpayment" on cuts and spending increases that would avoid the fiscal cliff and push back the deadline a few montsh.
With the "fiscal cliff" looming and no "grand bargain" in sight, talk in Washington has turned to a "down payment" - a package of spending cuts and revenue increases that would help us avoid the cliff and give leaders more time to strike a long-term deal. House Speaker John Boehner says such a mini-deal would serve as "a down payment on - and a catalyst for - major solutions, enacted in 2013, that begin to solve the problem."
Unfortunately, the opposite is true. Passing a down payment now could very well doom the chances for major tax and spending reforms next year.
Since Republicans are (for the moment) holding firm to their opposition to raising tax rates, the only way to increase revenues in a down payment is to close loopholes and limit or eliminate deductions - something Republicans have expressed a willingness to do as part of a larger deal for tax and spending reform.
As the Wall Street Journal recently pointed out, there's a lot more revenue here than most people realize. According to the liberal Tax Policy Center, capping all itemized deductions at $50,000 a year would yield $749 billion in extra revenue over 10 years - almost as much as the $823 billion that President Obama's plan to raise tax rates on top earners would yield in the same period. Moreover, such a cap would soak the rich first. The top one-fifth of income earners would pay more than 96 percent of the higher taxes.
If you lower the cap on deductions even further to $25,000, there's even more revenue to be found - an additional $1.286 trillion over 10 years. And a $17,000 cap would raise an additional $1.747 trillion in a decade.
In other words, limiting deductions can buy a lot of tax reform - unless, that is, Republican leaders shoot themselves in the foot and give that revenue away in a year-end down payment deal.
Any short term deal would mean inaction later. When are we going to face the fact that politicians will not cut enough or raise enough revenue to address the massive deficits and debt we carry? Politicians are not in the business of inflicting pain on their constituents either by taking away some of their goodies or slamming them with increased taxes. Hence, a short term deal that cuts little and raises little revenue to address the immediate crisis but then allow a return to business as usual - spending as much of our money, our children's money, and our grandchildren's money as fast as they can think up new things to spend it on.
Eventually, the laws of economics will catch up to us and we'll be facing utter and immediate ruin. I wonder if that prospect will rouse our somnolent legislators and get them to act then?
Don't bet on it.