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Get on Track for Sustainability

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Bruce Bartlett

Despite Republican propaganda to the contrary, the long-term fiscal problem of the United States is principally that revenues are too low. If fixing this problem required a legislated tax increase, the nation would be in serious trouble, because Republicans will forever block it as long as they have the ability. Fortunately, they handed Barack Obama the power to permanently fix our fiscal problem if he has the courage and skill to use it.

The core problem, from the Republicans’ point of view, is that they stupidly enacted temporary tax cuts during the George W. Bush administration. Their expiration creates a bludgeon that could eventually beat sense into them on the tax issue.

In December 2010, Republicans congratulated themselves that their strategy was working when they refused to negotiate with President Obama because he demanded that tax cuts for the rich be allowed to expire. Faced with an earlier “fiscal cliff” on Jan. 1, 2011, he caved to Republican intransigence and agreed to a two-year extension of all the Bush tax cuts. That extension expires at the end of this year, and President Obama has renewed his demand that taxes on the rich be allowed to rise.

Republicans like the House speaker, John Boehner of Ohio, are talking bravely about holding the line on taxes, and Mr. Boehner has dismissed the demand for higher tax rates for the rich.

In 2010, the economy was too fragile to take risks, even temporarily. President Obama had no choice but to cave. Today, the president’s hand is greatly strengthened, the economy is much stronger, and he is running out of time to get America’s fiscal house in order on his watch. Republicans are chastened by their defeat, and he will never hold a stronger hand against them than he does now. Therefore, taking the risks with the tax cuts, at least temporarily, is now a viable option.

If things go bad because of Republican inflexibility, the political dynamics change completely in January. At that point, Republicans have to accept whatever tax cut Obama is willing to support to replace the Bush tax cuts in whole or part. His veto pen would be enough to force Republicans to negotiate in good faith for a change, even if Democrats didn’t control the Senate.

Any 2013 tax cut that would offset the effect of allowing the Bush tax cuts to expire can easily be made retroactive. The Internal Revenue Service can delay changing withholding tables for average wage earners if it chooses, on the assumption that their tax cuts will be preserved under any possible compromise, thus forestalling any impact from the fiscal cliff on the vast majority of Americans.

And here’s the kicker. All President Obama has to do is insist that whatever retroactive tax cuts are enacted next year be temporary. Not only will this mitigate the impact of higher taxes for the same reason that temporary tax cuts are limited in their impact, but he will have another opportunity in a year or two to bludgeon Republicans back to the negotiating table, where their adamant opposition to higher taxes will again be negated by an automatic tax increase absent Congressional action.

Revenues are just 15.8 percent of gross domestic product, compared with a postwar average of 18.5 percent, which even Mr. Norquist accepts as a long-term goal. The sooner we get there, the sooner we can get the national finances on track toward sustainability.

Because Republicans now lack the power to prevent legislated tax increases, the nation is no longer held hostage to their stubborn opposition to any tax increase whatsoever, which has torpedoed every serious effort to reduce the trajectory of debt since 2010.

That is why I am optimistic about our fiscal future.

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author ofThe Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take. This post is excerpted from The New York Times Economix blog with the permission of the author.

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  • Anonymous

    They’re not telling the whole truth. Sure Obama does have the power to do something about the fiscal cliff but, he’s not going to do what you think he might do. from what I understand Americans have leveraged themselves in order to obtain so much stuff from overseas that the market here has become saturated. Wall Street decided long ago that leveraging or charging things or ‘ Creditism ‘ is better than crony capitalism, so now, the government must run a huge deficit for years to come until they figure out a way to stop the madness they created. You will see Austerity, you will lose your homes and you will be pathetic just like the people in Greece. Rich people are not going to change their lifestyle for you and I. They don’t care and that’s final. We will take the hit and they will throw us crumbs in the direction of your local church where you can fist fight with other poor souls for your share of the gruel.

  • Anonymous

    If those in charge were smart, they would forgive all debt, world wide at once and start over by jailing those responsible for things like getting rid of Glass-Steagle and exotic products like credit default swaps which by the way are positioned to take down the world for good this time being, there’s 700 trillion dollars worth of wagers tied to every persons debt in America. Oh yeah, don’t believe it? Do your home work. It only takes a slight breeze to start the chain reaction like before and, this time it will devastate the entire planet.

  • Anonymous

    But there is a good side to that scenario. Chances are I would recognize Gaithner or Bernanke eventually, dining at the same dumpster as me. Wouldn’t that be a great time for us to discuss politics and economics. :)

  • Anonymous

    OH yeah, everyone her knows what gruel is right? They don’t call it porridge (pooridge) for nothing.

  • Anonymous

    There is a solution for healing capitalism, restoring employment, building private savings and diminishing private debt. It is called Modern Monetary Theory (MMT), which describes how a purely fiat currency actually works and how it functions to achieve these social ends. It’s original American proponent was Founding Father Benjamin Franklin, as addressed in his essay entitled A Modest Inquiry into the Nature and Necessity of a Paper Currency, described in a publication from the Philidelphia Fed, by Farley Grubb. The problem with our current economic action is the illusion that we are still on a gold standard, which is uses an almost reverse accounting strategy than that used by a pure fiat currency, which is our current system, so hence our current deficit crisis. A better understanding can be found by watching lectures online from economics professor Stephanie Kelton and investor Warren Mosler, and other MMT economists. One of the proponents is Bill Black, an economist who has been a guest on Moyer’s show in the past. A good starting place is a series called Modern Money and Public Purpose, at a website by the same name.

  • Mary Lee

    Of course, if the Bush cuts are allowed to expire without a replacement deal, the middle class will be hit the hardest. Once the middle class has been pummeled down, who will serve the wealthy? I guess they’ll extend off-shoring practices.

  • Notanotherskippy

    Please stop pretending that Bruce Bartlett is a fiscal conservative. This piece just perpetuates the myth that we don’t pay enough taxes. Bartlett knows full well that even a return to the historical 18% (fine, let’s give him his 18.5%) of GDP in collected revenue still eaves the country with a 5% of GDP annual budget. But the issue is far worse than that. Two thirds of the Federal budget today is already spent on mandatory spending programs, principally entitlements. But wait, there’s more! On the present trajectory entitlement costs are expected to reach 20% of GDP all by themselves in the next few decades. That means that simply to be in structural balance tax collections will have to double from where they are now to continue to feed the beast.

    Keep lying to the masses that all we need is just a little more taxation from the top 2% –whatever happened to the 1%?– when the reality is that we are spending ourselves into oblivion.

    Mr. Moyers, please just be honest for a change and admit that you are a die hard progressive and do not present the other side honestly. Stop your obsession with Grover Norquist and ask yourself just what is George Soros spending his money on. Ask why Obama is so committed to disarming the threat of the debt ceiling that he himself voted against raising when he was a senator in 2006. In short, be honest for a change.

  • Scott Phillip Hedlin

    I’m pleased to see MMT enter this discussion. Just for the record economics is distorted when the zero sum of balances is ignored. Let’s say the government spends 5 dollars that 5 dollars becomes a credit in the private sector. – 5 + 5 = 0 It’s important to the discussion that the money government spends is not lost, but that it has driven economic growth. Government spending is guided action that has more or less freedom to enable social policy. What the treasury knows and what the federal reserve knows is that our government can never be forced to default on debt as it is the sole issuer of currency. It doesn’t have to borrow,but can choose to do so in the interests of policy, such as recycling surpluses and controlling interest rates. The US has a counter-cyclical freedom that should have been acknowledged when it left the gold standard. Instead it has chosen to act under a paradigm of conflicting politics to the great disadvantage of it’s own people. The greatest obstacle to recovery from this recession is the debt ceiling and a responsible congress would not delay recognizing this. An economy with such a high rate of unemployment and excess production can handle a massive infusion of money spent in the real economy without risking immanent inflation. This is the breathing room we need to step back from the trigger rigged politics of the fiscal cliff when we can without immediate pressure follow into resolving tax reform and debt with solid economic alternatives.

  • Anonymous

    Please stop pretending that Bruce Barlett isn’t a fiscal conservative. Bruce Barlett is a responsible traditional fiscal conservative. What Bruce Barlett isn’t is an irresponsible neoconservative.