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Sunday, December 23, 2012

'In the Fiscal Debate, a Little Symbolism Can Go a Long Way'

Tyler Cowen on the negotiations over the fiscal thingie:

In the Fiscal Debate, a Little Symbolism Can Go a Long Way, by Tyler Cowen, Commentary, NY Times: ...We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.
Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. ...
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.
Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice. ...
Of course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.
In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.

Maybe I'm just having one of those days and can't see the obvious, a house full of family will do that, but I'm a bit confused about the spending side of this proposal. Does Tyler mean that the spending cuts Obama has proposed will remain, but the tax increase will be moderated for now and replaced by a commitment to increase them further at some future date? If so (and I may have this wrong), why is the only worry that "Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cut"? Why isn't it undesirable to cut spending as well? When all is said and done, spending cuts plus tax increases, how would the burden be distributed? Is the current situation -- the baseline from where we start the changes -- fully optimal, or do we also need to correct distortions, inequities in the past distribution of income, etc.? If there are corrections that are needed, and I believe there are, then the share equally notion has much less force.

It's true that “we are all in this together” under Tyler's proposal, but it is not at all clear that the shares are equitable. In any case, it probably doesn't much matter since the chances of Republicans agreeing to vote for a tax increase, no matter how small, is extremely low.

    Posted by on Sunday, December 23, 2012 at 10:18 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  Comments (30)

          


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