With President Obama's re-election already won, the next hurdle to face is the so-called "fiscal cliff", which is a set of tax hikes and spending cuts that will automatically occur on January 1, 2013 if no action is taken. While such a thing would clearly reduce the deficit, the Congressional Budget Office predicts that it would also likely trigger another recession given the already weak economy. Specifically, it would be the middle-class tax hikes and some of the spending cuts that would be the real problem, not the tax hikes on the rich. However, if we don't address the deficit at all, then we're in financial trouble as well, at least in the long run. And to top it off, the debt ceiling will have to be raised yet again in late January or early February. Seems like we're stuck between the proverbial rock and a hard place, between the devil and the deep blue sea.
Not really, though. As UC Berkeley professor Robert Reich so cleverly points out, the real problem is House Speaker John Boehner and the rest of the Repugnicans in Congress who are willing to play chicken with the economy. They will apparently do anything to avoid even a modest tax hike on the top 1% of Americans, even if it means ruining our country's credit rating and/or crashing the economy. Basically, everyone's ox would get gored except the ultra-rich if the Repugnicans had their way.
The best thing for Obama to do is to start out bold and aim high, rather than start out with a compromised position. According to Robert Reich, this means the following:
1) Raise taxes on the rich--by a LOT. Enough so the average millionaire would pay an effective rate of about 55% after all deductions and credits, as it was 60 years ago. (The top marginal rate would have to be at least 70%, and every dollar above the first million would have to be taxed at 50% or more)
2) Create a 2% wealth tax on the net worth of the top 0.5% of Americans.
3) Create a 0.5% financial transactions tax.
4) Raise the capital gains tax to match the rate on ordinary income, and cap the mortgage interest deduction at $12,000 per year.
5) Eliminate special tax preferences and subsidies for Big Oil, Big Pharma, Big Agro, Wall Street, and so-called "defense contractors."
6) Last but not least, let the Bush tax cuts expire for incomes between $250,000 and $1 million.
Doing all of these things would reduce the deficit by $4 trillion over the next ten years (the same as what Simspon-Bowles proposed), but without cutting any vital programs or raising taxes on the middle class. This is the crucial difference between what Professor Reich proposes and what the Repugnicans propose. And it wouldn't crash the economy, as the best studies have shown.
While Professor Reich acknowledges that some sort of compromise is inevitable, he also notes that any such "grand bargain" to avoid the cliff must contain the following stipulation: any sort of tax hike on the middle class and any sort of spending cut must only be permitted with a triggering mechanism of two consecutive quarters of 6% unemployment or lower and 3% GDP growth or higher. This caveat would ensure that we really are out of the woods before sucking any significant amount of aggregate demand out of the economy, echoing Keynesian economic theory. It is also very important to note that, unlike last time, progressives actually have the upper hand right now--so let's not squander it. No deal is still better than a bad deal.
Of course, there are other ways of accomplishing a similar or even greater deficit reduction, as the TSAP has repeatedly proposed. In fact our own proposals would eliminate not just the deficit, but the entire national debt as well. But much of what we have proposed dovetails rather nicely with what Professor Reich suggests, and that is an excellent start. What better time than now?