Committee for a Responsible Federal Budget

Don't Move the Cliff...Fix the Cliff

Jun 20, 2012 | Budgets & Projections| Taxes

We're seeing more stories, in recent days, floating the idea that policymakers might waive the entire fiscal cliff, at least temporarily. One piece in Reuters suggests that there could be a bipartisan agreement in Congress to couple a short term extention of the 2001/2003 tax cuts with a process to reform the tax code. Here's what the Reuters article said in referring to comments from Sen. Max Baucus (D-MT):

 The top tax-writing lawmaker in the U.S. Senate expressed interest in a bipartisan proposal to extend all tax cuts expiring at year's end, coupled with a mandate to force Congress to revamp the tax code within a set time frame.

Senator Max Baucus' receptiveness to the idea reflects one strand of thinking among some Democrats: that despite their preference for letting tax rates rise only for the wealthy, a more likely scenario in an end-of-the-year deal with Republicans may involve extending the low rates for all taxpayers at least for a short period of time. 

Using the tax cuts as an incentive to enact tax reform makes a lot of sense (in fact, we talked about that idea two years ago), and given the difficulties associated with tax reform it is certainly sensible to set up a process aimed at achieving it. But we shouldn't just ignore the costs of a one-year extension or, more importantly, the cost of locking in a tax cuts-extended level of revenue permanently with a new tax code.

Any extention of the fiscal cliff policies really should come with a detailed plan to put the debt on a smart and gradual downward path. If process must be the answer, there should at least be a detailed framework with revenue and spending targets, credible enforcement mechanisms, and some deficit-reducing policy changes upfront. That would at least guarantee that the process will not be used to effectively deficit-finance the tax cuts.

We have shown in the past the huge increase in debt that would come from extending most or all of the tax cuts without offsetting the costs (and that goes for averting the rest of the cliff as well). The fiscal equation becomes much more difficult if that happens. Any plan to delay the fiscal cliff must either pay for the costs or else put the debt on a sustainable path.