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
April 16, 2014 -- Updated 1642 GMT (0042 HKT)
Rick McGahey says Rep. Paul Ryan is signaling his presidential ambitions by appealing to hard core Republican values
April 16, 2014 -- Updated 1539 GMT (2339 HKT)
Paul Saffo says current Google Glasses are doomed to become eBay collectibles, but they are only the leading edge of a surge in wearable tech that will change our lives
April 15, 2014 -- Updated 1849 GMT (0249 HKT)
Kathleen Blee says the KKK and white power or neo-Nazi groups give haters the purpose and urgency to use violence.
April 16, 2014 -- Updated 1156 GMT (1956 HKT)
Sen. Sheldon Whitehouse and Rep. Henry Waxman say read deep, and you'll see the federal Keystone pipeline report spells out the pipeline is bad news
April 16, 2014 -- Updated 1153 GMT (1953 HKT)
Frida Ghitis says President Obama needs to stop making empty threats against Russia and consider other options
April 15, 2014 -- Updated 2129 GMT (0529 HKT)
Peter Bergen and David Sterman say the Kansas Jewish Center killings are part of a string of lethal violence in the U.S. that outstrips al Qaeda-influenced attacks. Why don't we pay more attention?
April 15, 2014 -- Updated 1641 GMT (0041 HKT)
Danny Cevallos says families of the passengers on Malaysian Airlines Flight 370 need legal counsel
April 14, 2014 -- Updated 1523 GMT (2323 HKT)
David Frum says Russia is on a rampage of mischief while Western leaders and Western alliances charged with keeping the peace hem and haw
April 14, 2014 -- Updated 1156 GMT (1956 HKT)
Most adults make the mistakes of hitting the snooze button and of checking emails first thing in the morning, writes Mel Robbins
April 14, 2014 -- Updated 1754 GMT (0154 HKT)
David Wheeler says as middle-class careers continue to disappear, we need a monthly cash payment to everyone
April 14, 2014 -- Updated 1155 GMT (1955 HKT)
Democrats need to show more political spine when it comes to the issue of taxes.
April 14, 2014 -- Updated 1555 GMT (2355 HKT)
Donna Brazile recalls the 50th Anniversary of the Civil Rights Act as four presidents honored the heroes of the movement and Lyndon Johnson, who signed the law
April 14, 2014 -- Updated 1317 GMT (2117 HKT)
Elmer Smith remembers Chuck Stone, the legendary journalist from Philadelphia who was known as a thorn in the side of police and an advocate for the little guy
April 13, 2014 -- Updated 1856 GMT (0256 HKT)
Al Franken says Comcast, the nation's largest cable provider, wants to acquire Time Warner Cable, the nation's second-largest cable provider. Should we be concerned?
April 11, 2014 -- Updated 1522 GMT (2322 HKT)
Philip Cook and Kristin Goss says the Pennsylvania stabbing attack, which caused grave injury -- but not death, carries a lesson on guns for policymakers
April 11, 2014 -- Updated 1906 GMT (0306 HKT)
Wikipedia lists 105 football movies, but all too many of them are forgettable, writes Mike Downey
April 11, 2014 -- Updated 1432 GMT (2232 HKT)
John Sutter and hundreds of iReporters set out to run marathons after the bombings -- and learned a lot about the culture of running
April 11, 2014 -- Updated 1649 GMT (0049 HKT)
Timothy Stanley says it was cowardly to withdraw the offer of an honorary degree to Ayaan Hirsi Ali. The university should have done its homework on her narrow views and not made the offer
April 11, 2014 -- Updated 1416 GMT (2216 HKT)
Al Awlaki
Almost three years after his death in a 2011 CIA drone strike in Yemen, Anwar al-Awlaki continues to inspire violent jihadist extremists in the U.S, writes Peter Bergen
April 12, 2014 -- Updated 0121 GMT (0921 HKT)
David Bianculli says Colbert is a smart, funny interviewer, but ditching his blowhard persona to take over the mainstream late-night role may cost him fans
April 10, 2014 -- Updated 1731 GMT (0131 HKT)
Rep. Paul Ryan says the Republican budget places its trust in the people, not in Washington
April 10, 2014 -- Updated 2128 GMT (0528 HKT)
Aaron David Miller says Obama isn't to blame for Kerry's lack of progress in resolving Mideast talks
April 14, 2014 -- Updated 1522 GMT (2322 HKT)
David Weinberger says beyond focusing on the horrors of the attack a year ago, it's worth remembering the lessons it taught about strength, the dangers of idle speculation and Boston's solidarity
April 10, 2014 -- Updated 1632 GMT (0032 HKT)
Katherine Newman says the motive for the school stabbing attack in Pennsylvania is not yet known, but research on such rampages turns up similarities in suspects and circumstances
April 11, 2014 -- Updated 1103 GMT (1903 HKT)
Simon Tisdall: Has John Kerry's recent track record left Russia's wily leader ever more convinced of U.S. weakness?
April 10, 2014 -- Updated 1640 GMT (0040 HKT)
Mel Robbins says Nate Scimio deserves credit for acting bravely in a frightening attack and shouldn't be criticized for posting a selfie afterward
April 9, 2014 -- Updated 1839 GMT (0239 HKT)
Wendy Townsend says the Rattlesnake Roundup -- where thousands of pounds of snakes are killed and tormented -- is barbaric
April 10, 2014 -- Updated 1345 GMT (2145 HKT)
Dr. Mary Mulcahy says doctors who tell their patients the truth risk getting bad ratings from them
April 9, 2014 -- Updated 1328 GMT (2128 HKT)
Peggy Drexler says the married Rep. McAllister, caught on video making out with a staffer, won't get a pass from voters who elected him as a Christian conservative with family values
April 9, 2014 -- Updated 1143 GMT (1943 HKT)
David Frum says the president has failed to react strongly to crises in Iran, Syria, Ukraine and Venezuela, encouraging others to act out
April 9, 2014 -- Updated 2057 GMT (0457 HKT)
Eric Liu says Paul Ryan gets it very wrong: The U.S.'s problem is not a culture of poverty, it is a culture of wealth that is destroying the American value linking work and reward
April 9, 2014 -- Updated 1151 GMT (1951 HKT)
Frida Ghitis writes: "We are still seeing the world mostly through men's eyes. We are still hearing it explained to us mostly by men."
April 10, 2014 -- Updated 1408 GMT (2208 HKT)
Chester Wisniewski says the Heartbleed bug shows how we're all tangled together, relying on each other for Internet security
April 9, 2014 -- Updated 1926 GMT (0326 HKT)
Danny Cevallos says an Ohio school that suspended a little kid for pointing his finger at another kid and pretending to shoot shows the growth in "zero tolerance" policies at school run amok
ADVERTISEMENT