Skip to main content

How to bridge fiscal cliff

By Edward D. Kleinbard, Special to CNN
November 30, 2012 -- Updated 1640 GMT (0040 HKT)
STORY HIGHLIGHTS
  • Edward Kleinbard: America's fiscal policy faces an apparent Hobson's choice
  • Kleinbard: But the dilemma of fiscal cliff is more apparent than real
  • He advocates a three-year transition from current policies to a more sustainable mix
  • Kleinbard: We can do it without being sure what the new taxing and spending rules will be

Editor's note: Edward D. Kleinbard is a professor at Gould School of Law at the University of Southern California. He is the former chief of staff of Congress's Joint Committee on Taxation.

(CNN) -- America's fiscal policy faces an apparent Hobson's choice. On the one hand, we need to tame federal deficit spending by imposing new across-the-board spending cuts and higher taxes. We are told that if we do not act on this soon, the debt markets will choke on the overabundance of government debt issued to fund those deficits, causing interest rates to climb. As a result, businesses and homeowners will be unable to borrow on reasonable terms, which will lead to a slowdown of the economy.

On the other hand, we also are told that allowing this deficit reduction program actually to take effect in 2013 would precipitate a new recession.

Edward D. Kleinbard
Edward D. Kleinbard

Faced with two genuinely unpalatable courses of action, it's no wonder that Washington struggles to find a consensus.

But, the dilemma is more apparent than real, because it confounds the dimension of time.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



What we need to do is to commit today to a transition -- a ramp -- from our current taxing and spending policies to a more sustainable mix. A firm congressional commitment, for example, to a three-year ramp, by means of which we move to a sensible combination of higher taxes and lower spending, should enable the economy to heal while reassuring markets that the long-term fiscal health of the country will be restored.

Of course, advocating a three-year transition from where we are to where we need to be is the easy part. The real challenge is to identify the new policies.

A bona fide "grand bargain" might need to encompass as much as $8 trillion in lower spending and higher taxes over 10 years to address fully the underlying fiscal trends, not the much smaller numbers currently bandied about. Figuring out how to do that will be extremely painful for Congress, because regardless of party affiliation, members like to give more than they like to take away.

Tax cuts and political reality
Barrasso discusses the fiscal cliff
Rep. Cole: Tactic strengthens position

The genuine difficulty of defining the new mix of taxing and spending policies that will apply at the end of the ramping-up period means that negotiations will take a great deal of time. But our dilemma reminds us that we do not have the luxury of time to thrash out all the components of this sustainable path, if we are to avoid an immediate recession.

We have to define the ramp to a new fiscal policy without being sure exactly what those new taxing and spending rules will be. This sounds impossible: How do you build an off ramp from a highway to connect to another road that does not exist and has not yet even been mapped?

There is a way to do just that. First, let all the Bush tax cuts and other temporary tax discounts expire (which is what legislative inaction will trigger on January 1), but phase in the expiration of the Bush tax cuts over three years (so that a third of the extra tax bite is added each year). At the same time, repeal the $1 trillion of new across-the-board spending cuts (the "sequestration") to which Congress committed itself when the budget "supercommittee" failed.

These two steps define the ramp. The repeal of the spending cuts adds to the deficit but is far outweighed over time by the incremental taxes that would be raised if all the Bush tax cuts expired.

The nonpartisan Congressional Budget Office projects that those higher tax revenues largely solve the deficit problem over the next 10 years or more. The resulting tax system can simultaneously be improved, for example by eliminating the hated Alternative Minimum Tax, without any further revenue costs through a few surgical strokes I have advocated before.

Then, let Congress do what it does best, which is to cut taxes starting three years from now -- but with a catch. The deal must be that Congress bind itself in advance automatically to apply new spending cuts (compared with the budget office's projections) to tax rate rollbacks. So, for every $1 billion reduction in government spending, Americans' tax bills automatically would be cut by $1 billion.

Those tax rate rollbacks should start with the lowest tax bracket first. The reason for this ordering is that all taxpayers, rich and poor alike, get the benefit of the lower tax brackets on their income in that bracket. By buying down tax rates from the bottom up, the proposal shares the savings from new government spending cuts across the broadest possible number of Americans.

Under this proposal, the ramp up to a sustainable budget would be set in advance (through the three-year staged repeal of all the Bush tax cuts), as would the way to lighten the load without deviating from the path's ultimate goal of fiscal sustainability (through spending cuts automatically applied to buying down those scheduled tax rate hikes).

Given this opportunity, both parties will have strong incentives to agree to spending cuts, because each net spending reduction will bring new tax relief to constituents. If Congress enacts large enough spending cuts, all the tax rate hikes would automatically roll back.

Over time, Congress will reach a balance between new taxes and reduced spending through negotiations that offer members a positive reward -- tax relief -- to counterbalance the bitter pill of spending cuts. But the key is that those scalebacks in government spending programs do not have to be identified before this Christmas; as each is enacted in the months or even years to come, the automatic mechanism would deliver tax rate rollbacks to Americans.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Edward D. Kleinbard.

ADVERTISEMENT
Part of complete coverage on
July 29, 2014 -- Updated 1650 GMT (0050 HKT)
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
July 28, 2014 -- Updated 1156 GMT (1956 HKT)
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
July 26, 2014 -- Updated 1822 GMT (0222 HKT)
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
July 28, 2014 -- Updated 1251 GMT (2051 HKT)
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
July 28, 2014 -- Updated 1852 GMT (0252 HKT)
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
July 28, 2014 -- Updated 1831 GMT (0231 HKT)
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
July 28, 2014 -- Updated 1850 GMT (0250 HKT)
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
July 28, 2014 -- Updated 1635 GMT (0035 HKT)
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
July 26, 2014 -- Updated 1555 GMT (2355 HKT)
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
July 27, 2014 -- Updated 1822 GMT (0222 HKT)
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
July 24, 2014 -- Updated 2225 GMT (0625 HKT)
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
July 25, 2014 -- Updated 1510 GMT (2310 HKT)
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
July 26, 2014 -- Updated 1533 GMT (2333 HKT)
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
July 25, 2014 -- Updated 1245 GMT (2045 HKT)
John Sutter responds to criticism of his column on the ethics of eating dog.
July 25, 2014 -- Updated 1302 GMT (2102 HKT)
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
July 25, 2014 -- Updated 1850 GMT (0250 HKT)
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
July 24, 2014 -- Updated 1803 GMT (0203 HKT)
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
July 24, 2014 -- Updated 1349 GMT (2149 HKT)
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
July 23, 2014 -- Updated 2205 GMT (0605 HKT)
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
July 24, 2014 -- Updated 1142 GMT (1942 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1853 GMT (0253 HKT)
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
July 24, 2014 -- Updated 1317 GMT (2117 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1637 GMT (0037 HKT)
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
July 24, 2014 -- Updated 1413 GMT (2213 HKT)
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
July 23, 2014 -- Updated 1630 GMT (0030 HKT)
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
July 23, 2014 -- Updated 1408 GMT (2208 HKT)
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT