October 2, 2012, 6:00 AM The ‘Fiscal Cliff’ Opportunity By BRUCE BARTLETT

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 of “ The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take .” With polls consistently showing a steady lead for Barack Obama in the presidential race, it’s not too soon to start thinking about what he will do the day after the election. In particular, what will be done about the looming “fiscal cliff,” which begins on Jan. 1, when previously enacted spending cuts and tax increases take effect. These automatic tax increases and spending cuts will reduce the budget deficit by about $600 billion next year if all of them are allowed to take effect. This fiscal tightening is equal to about 4 percent of the gross domestic product, and the Congressional Budget Office estimates that it will reduce G.D.P. growth by an equal amount next year. There is evidence that the

1 fiscal cliff is already affecting business investment spending , slowing economic growth. Dealing with the fiscal cliff will undoubtedly be the principal item of business when Congress returns for a lame-duck session. Talks between the administration and Congressional leaders have already begun but have been hampered by questions about who will be president in January, as well as which party will control the House and Senate.

Although it appears that the Republicans will retain control of the House while Democrats’ prospects of continuing to have a Senate majority have improved, the majority margins are likely to narrow. This could be a particular problem in the House, where Representative John Boehner of Ohio, the speaker, has never had a firm hold on power because he is viewed with suspicion by the G.O.P.’s Tea Party wing. The budget analyst Stan Collender speculates that Mr. Boehner will be on a short leash during the lame-duck session as the Tea Party tries to maintain influence after a disappointing election. This means that Mr. Boehner will have little scope to negotiate with Democrats on a compromise that would forestall the fiscal cliff, making it likely that the fiscal cliff measures will begin as scheduled. The two primary sticking points are taxes and military spending. President Obama is insisting that the Bush tax cuts not be extended for those with incomes over $250,000. For them, the top tax rate would rise to 39.6 percent — what it was during the Clinton administration — from 35 percent. The

2 administration would also like to raise the maximum tax rate on dividends and capital gains to 20 percent for upper-income taxpayers, from 15 percent currently. Republicans are adamantly opposed to any increase in taxes for anyone, but especially the wealthy, whom they universally view as “job creators,” even if all they do is cash dividend checks on inherited stocks. But Republicans are even more concerned about impending cuts to military spending, which they agreed to last summer as part of the deal to raise the debt ceiling. Both Mitt Romney and Paul D. Ryan have repeatedly denounced the programmed $600 billion cut (over nine years) in military spending that will begin next year — which the vast majority of House Republicans, including Mr. Ryan, voted for last year — saying it will endanger national security. Curiously, they also invoke the negative effect on jobs. As Mr. Romney said in his acceptance speech at the Republican convention, military spending cuts “will eliminate hundreds of thousands of jobs.” The reason this is curious is that Republicans routinely deny that government spending cuts raise unemployment. Indeed, their core philosophy is that reducing the size of government creates jobs by reducing its burden and freeing resources for use by the private sector. But faced with cuts in programs they favor, suddenly a key argument for preventing such cuts is the potential job loss. Of course, the logic of the Republican argument on military spending cuts applies equally to domestic

3 spending cuts. Just at the state and local government level, spending cuts have cost 659,000 jobs since 2009, raising the national unemployment rate by about 0.5 percent. That Republicans adamantly refuse to acknowledge this reality is an example of what psychologists call “ cognitive dissonance .” One option for dealing with the fiscal cliff is simply to kick the can down the road — that is, delay all the spending cuts and tax increases for a year while Congress and the White House theoretically negotiate something better. But given the propensity of Republicans in the Senate to filibuster anything they don’t like, no matter how trivial, and the fact that virtually all have signed a “taxpayer protection pledge ” vowing never to raise taxes for any reason, the likelihood of compromise without severe external pressure is unlikely. A better idea, in my opinion, is to let the fiscal cliff occur as scheduled and enact a fix retroactively, as soon as possible. This is an idea that the former director of the Office of Management and Budget, Peter Orszag , and the Brookings Institution economist William Gale have been promoting for several months. The virtue of the Orszag-Gale strategy is that it changes the political dynamics. Once taxes have risen on everyone, legislation restoring the status quo ante for all except the wealthy would be scored as a tax cut. While doing this before Dec. 31 would be a violation of the pledge, doing so after Jan. 1 would not.

4 Similarly, negotiating some alternative to the automatic budget sequestration on the spending side — which everyone agrees is a stupid way to reduce spending — will proceed much more easily, because Republicans will be under intense pressure to negotiate in good faith for a change and avoid filibusters. It goes without saying that in a world without tax pledges and filibusters, it would be in everyone’s interest to negotiate a sensible alternative to the fiscal cliff in the lame-duck session; indeed, it should have been done before Congress left town. But we don’t live in such a world. Therefore, extreme and unpleasant tactics may be necessary to do what needs to be done. My advice to President Obama: have your staff prepare an alternative to the fiscal cliff that can be sent to Congress as soon as it reconvenes this year, prepare for Republicans to reject it and then hope to negotiate something that can be enacted as soon as possible in the next Congress. Kicking the can down the road is unacceptable and should be rejected out of hand.

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