It’s a tricky, fog-shrouded trail that winds along the edge of the federal fiscal cliff, one whose twists and turns can baffle an unwary rambler. So herewith, a few guideposts that point to a realistic path forward.
1. GOP assertions that a return to Clinton-era income tax rates for upper earners will clobber small businesses are vastly overstated. Those rates would hit only about 3 percent of small businesses. And though Republicans argue that those are the companies that generate much of small business income, that claim is also highly dubious. Why? Because the definition of small business it’s built on includes many filers that either aren’t businesses at all or that don’t fit any reasonable definition of small.
Recent history also belies conservative economic contentions. As the Center on Budget and Policy Priorities notes, yearly gains in employment, GDP growth, and small business job growth were all greater after the Clinton tax hikes of 1993 than after the Bush tax cuts of 2001. That doesn’t mean higher taxes help the economy, but it does leave Republican predictions of calamity high and dry. That said, it’s just as important to acknowledge this truth:
2. Ultimately, we can’t solve our fiscal problems just by taxing upper earners. Now, there’s little doubt the Bush-era tax cuts helped blow a big hole in the federal budget. Those tax cuts, after all, cost the federal government between $3.7 trillion and $4 trillion over 10 years. But that figure is for all the tax cuts, not just the breaks for those making more than $250,000. However, both sides now want to keep the middle class cuts, which account for at least 75 percent of that lost revenue. So though ending the tax cuts for upper earners would be an important down payment on long-term deficit reduction, it won’t be enough.
That’s true even if Obama gets the full $1.4 trillion to $1.6 trillion he wants from the wealthy. Even that amount doesn’t come close to replacing the revenue lost to the middle-class tax breaks — which means, over time, the nation really can’t avoid this reality:
3. The middle class can’t be held harmless in the effort to solve our long-term fiscal problems.
There’s a virtual consensus among fiscal experts on that point. “Sooner or later, taxes for a much wider swath of the population are going to have to be raised or we are going to have to have more Draconian reductions in entitlements, which will affect middle and lower income people significantly,” says Robert Reischauer, former director of the Congressional Budget Office.
“Maybe for the time being we can get most of the way protecting people making under $250,000, but in the longer run . . . we will need more revenue and we are not going to be able to get all that from the wealthy,” agrees James Horney, vice president for federal fiscal policy at the Center on Budget and Policy Priorities.
That reality, says Leonard Burman, professor of public affairs at Syracuse University’s Maxwell School, will eventually leave policymakers facing this choice: Significant cuts in Medicare and Medicaid (much of which goes for nursing home care) and only modest tax increases on the middle class, or modest cuts in those federal health care programs, but bigger middle-class tax increases.
“As the president likes to say, it is really just arithmetic — though the president doesn’t like to say the arithmetic means anything for the middle class,” notes Burman, who also stresses one final reality:
4. Whatever deficit-reduction equation policymakers settle on will be easier if we can reduce real health care costs. After all, notes Burman, if policymakers can’t bend the health care cost curve, all that cutting Medicare and Medicaid spending will really do is shift unaffordable health care costs onto state governments or individuals.
Those are the sometimes difficult truths of our fiscal dilemma. Until both sides of the divide acknowledge them, we won’t truly solve our long-term problems.