Re the fiscal cliff, I’ve tried hard to keep my head in the sand, figuring I can always go back to watching the news in 2016. So I’m not completely up to date on all this stuff, and I might be missing something important. But here are a few last-minute observations:
- “Going over the cliff” refers to a bunch of tax increases together with a bunch of spending cuts. Tax increases and spending cuts are not the same thing, so there are really two separate cliffs here. We should analyze them separately.
- Taking the path of spending as given, lower taxes now mean higher taxes later and vice versa. Given that, it’s not at all clear that higher taxes now are a bad thing.
- Going over the cliff means that a lot more people will be paying the AMT. That’s definitely a good thing. The AMT is a far simpler and more efficient tax than the ordinary income tax. Letting the AMT kick in might be the most politically feasible way to effectively eliminate a ton of otherwise untouchable deductions.
- A lot of the spending cuts are desirable, and might never happen unless we take the cliff plunge.
- There seems to be a lot of concern about the timing of this thing, with references to a “fragile economy”, etc. But I think it is nuts to tie long-term tax and spending policies to the vagaries of the business cycle. If we can make our tax code more efficient, we should do that. If we can eliminate inefficient spending, we should do that. Arguably, plunging over the twin cliffs is a way to accomplish both.
- Obviously, the whole package is highly imperfect. It entails, for example, a huge increase in estate tax rates, which ought to be zero. But perfection is not a realistic goal. The choice is not between plunging over the cliff and walking safely away from the precipice; it’s between plunging over the cliff and clinging to some branch while waiting to be rescued by the same people who got us here in the first place.
All of which leads me to root for the plunge.
