A few thoughts with you on the tax component of the fiscal cliff debate and why lawmakers should “punt and tackle.”
Punt: To reassure business and financial markets, Congress should punt and extend the entire Bush era tax cuts across the board to provide some breathing room. As you know CBO says if we do go over the cliff and if no action is taken and we let the tax cuts and sequestration happen — we’re going to fall into another recession, with the economy contracting by 2.9% in the first half of next year and real GDP declining by 0.5% in 2013.
An ACCF study by Dr. Allen Sinai of Decision Economics (consulted for the Dem and GOP Administrations and Congress and Fed Reserve) concurs that there will be recessionary impacts if all of the Bush tax cuts to expire and return to previous levels ($855 billion in lost GDP, up to 3 million jobs lost, an average of $1 trillion in lost consumption spending) See http://accf.org/wp-content/uploads/2012/06/ACCF_specialReport_2012_Fiscal_FINAL.pdf.
But Sinai also looks at the impact of a scenario where lawmakers extend the current income tax rates but allows expiration of the current tax rates on capital gains and dividends (reduced real GDP of up to 0.7 percentage points compared to baseline the next several years, more than a half-million fewer persons working by 2015, in addition to negative effects on the stock market). These negative repercussions will impact the type of entrepreneurship, risk taking and job creation needed to jump-start the economy.
For these reasons, Congress and the president must punt now on taxes.
Tackle: The tax code must be fixed in 2013. Lawmakers should gear up for an extended debate on tax reform similar to what we experienced in 1986.
Beyond restoring our fiscal balance, we need economic growth and we need favorable tax policy conducive to that growth. It is time to have a serious discussion about broad tax reform as we did in 1978 and 1986. It’s time to look not only at tax rates but what we are taxing in the first place. A reduction in marginal rates can help stimulate economic growth but those lower rates should not be paid for with higher taxes on savings and investment in exchange. Under our current income tax structure that means on the individual side not increasing on capital gains and dividends and the generational wealth built from estates.
Lawmakers will be looking for ways to pay for any extensions on marginal tax rates. Instead of trading those reductions with higher taxes on the hard earned income, retirement security and the risk taking that fuel innovation and growth, they should consider a consumption tax.