United States: Fiscal Cliff

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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The United States Senate has voted on a compromise to avert the fiscal cliff (Wikipedia has an excellent brief on the fiscal cliff). The House could soon follow suit on the Senate compromise which is harsher on higher income tax payers than the vote which House Speaker John Boehner avoided before this Senate vote. Boehner had wanted tax increases on those earning more than $ 1 million. The Senate bill raises personal income tax rates on those earning more than $400,000 for single tax payers and $450,000 for married couples while phasing out the Bush tax cuts for all between the incomes of $250,000 and $450,000 and delaying spending cuts.

Taxes have gone up on the top 5% of US income earners whose share of national income has risen since 2002 while staying the same on the bottom 95% whose share of national income has fallen. Bush tax cuts have been fully preserved only for the middle class and allowed to partially or wholly expire for all others. The expiring Bush tax cuts will raise federal revenues by raising taxes in some measure on all incomes above $250,000 permitting the delay in spending cuts. Democrats in Congress have finally won the debate on the Bush tax cuts of 2002-2003.

That running chronic budget deficits and accumulating national debt or the “fiscal cliff” will eventually lead to higher taxes, deep spending cuts and higher interest rates is the staple of economics and the crux of the much criticized “Washington Consensus” in the language of international economics at the International Monetary Fund (IMF). In fact, higher taxes, spending cuts and higher interest rates was the standard IMF recommendation to debt-ridden countries. That this policy eventuality could begin to precipitate in 2013 in the United States, a champion of the Washington Consensus since the 1990s, is the irony.

If the policy inevitability of the challenge of reining-in the effects of large budget deficits and national debts or the “fiscal cliff” with higher taxes, deep spending cuts and higher interest rates is routine economic fare, its immediate effects on national economies can be devastating for growth and unemployment. Therefore, averting the fiscal cliff seems like commonsense, at least in the immediate term. However, putting off the fiscal cliff does not mean it will go away. Difficult government budget decisions must be committed to and phased-in over time, beginning now, whether it be Greece or United States of America.

A simple but effective solution to the problem of runaway national spending is to enforce the budget constraint by freezing the federal budget for the next 10 years in today’s nominal dollars and reforming federal spending within that budget constraint.


About Chandrashekar (Chandra) Tamirisa

This entry was posted in Economics, Fiscal Policy, North America and Caribbean, Transformations LLC and tagged , . Bookmark the permalink.

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