By Jessica Chau
Below are three highlights from today’s news clips about a new report by the Economic Policy Institute, concluding that extending the Bush tax cuts for the richest 2 percent would not significantly reduce the “fiscal obstacle course” at year’s end.
Huffington Post, Andrew Fieldhouse, Federal Budget Policy Analyst, Economic Policy Institute and The Century Foundation, 9/19/2012
The “fiscal cliff,” however, is a terrible metaphor — it implies an all-or-nothing choice between continuing all current budget policies and running smack into the legislated trajectory for fiscal policy. As explained in our new briefing paper, a better framework for understanding the impending drags is a “fiscal obstacle course.” Running into certain hurdles would all but guarantee a double-dip recession, whereas some other policies would only act as speed bumps moderately slowing growth — and policymakers can choose à la carte how to navigate this path. More critically, policymakers can fully (or more than) offset any of the adverse economic impacts associated with implementing long-term deficit reduction, particularly tax increases, with more efficient temporary fiscal support.
Maintaining the Bush-era tax cuts, on the other hand, would add only a meager 0.5 percentage points to growth, most of which comes from more targeted provisions for lower-income households (the 10 percent bracket and refundable credits). Allowing the upper-income tax provisions and estate and gift tax cuts to expire on schedule would shave a trivial tenth of a percentage point from growth (while saving $1.4 trillion over the next decade). The other handful of current budget policies typically renewed on an annual basis (patching the alternative minimum tax, extending business tax cuts, and preventing Medicare physician reimbursement cuts) would similarly add 0.5 percentage points to growth….
Enacting more targeted fiscal stimulus, such as infrastructure investments and aid to state governments, could smooth over any of these fiscal drags — particularly the smaller headwinds from the pending expiration of tax cuts. Well-targeted fiscal stimulus can deliver more than four times the economic boost per dollar as poorly targeted economic policies (e.g., Bush income tax cuts). Consequently, well-targeted fiscal stimulus could produce the same economic benefit of dodging all of these fiscal obstacles for roughly $318 billion (43 percent) less than their budgetary cost.
Washington Post, Suzy Khimm, 9/19/2012
…groups like the Center for Budget and Policy Priorities have stressed that the fiscal contraction won’t happen all at once, so legislators have a little more wiggle room than the image of a “fiscal cliff” suggests. The income tax changes, for instance, won’t take effect until taxpayers file their 2013 taxes after the calendar year, and the sequester cuts will take effect over the entire course of the year and subsequent years. So going over the cliff—which the CBPP characterizes instead as a “fiscal slope”—could be worth it if a good deal could emerge as a result.
Talking Points Memo, Brian Beutler, 9/19/2012
“[T]here is no good economic reason to extend the upper-income Bush-era tax cuts or the recently expanded estate and gift tax cuts; they fail any reasonable cost-benefit analysis for economic stimulus,” write EPI’s Josh Bivens and Andrew Fieldhouse [economists at the’ Economic Policy Institute… “Allowing them to expire would shave a meager 0.1 percentage point from real GDP growth in 2013 relative to current policy, but revenue would rise by $1.2 trillion (0.6 percent of GDP) over fiscal 2013-2022.”
….And many political vets believe that all the Bush tax cuts will have to expire, at least temporarily, if Obama wins re-election.
That would give President Obama leverage to work with Republicans on a broader package of spending cuts and tax cuts. The EPI report suggests near-term stimulus should be a part of the mix.