When I was a child, it was common in large cities to see men carrying hand-written signs that proclaimed, "The end of the world is coming." These days most doomsayers have blogs, but quite a few are Washington pundits who prophesy, "The fiscal cliff is coming." It's clear that "taxmageddon" is a disaster if Congress does nothing. Nonetheless, the crisis offers progressives three opportunities.
In February, Ben Bernanke, Chair of the U.S. Federal Reserve, coined the term fiscal cliff to describe what would happen on January 1, 2013: "[The U.S. will go over] a massive fiscal cliff of large spending cuts and tax increases."
What most Americans understand is that, unless Congress acts, their taxes will go up on January 1st. What is less well understood is that there also could be be a series of automatic spending cuts, "sequestrations," totaling $1.2 trillion split between defense and domestic spending.
Throughout 2012 the Congressional Budget Office studied the fiscal cliff and described the problem:
Taken together, CBO estimates, those policies will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013. The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance...Such a contraction in output in the first half of 2013 would probably be judged to be a recession. [Emphasis added.]
Because of the likely dire consequences, most observers believe that President Obama and Congress will reach some accommodation. During this process, progressives have three major opportunities:
1. Promote income equality: It's widely believed that raising everyone's taxes would inhibit the growth of U.S. GDP. However, many economists argue that increasing the tax rates of the richest 2 percent, those making over $250,000 per year, would have little impact on their behavior and would raise a huge amount of money. The top tax rate would revert to that of the Clinton era and increase from 35 to 39.6 percent. The White House estimates this change, plus increased taxes on investment income, would generate approximately $960 billion over the next decade. Progressives see this as one small step to address income inequality.
2. Attack Global Climate Change: To reach his objective of $1.6 billion in new revenues over ten years, President Obama is searching for $600 billion in additional revenue. Remedies he's proposed include changing the rules for the inheritance tax and a new form of the Alternative Minimum Tax that imposes the "Buffett Rule:" all taxpayers making more than $1 million would pay a minimum 30 percent tax.
Another way to provide additional revenue would be to impose a national carbon tax. Such a tax would be levied on all fossil fuels -- coal, natural gas and oil -- and would raise the price of many products; for example, gasoline, food and manufactured goods. In September, the Congressional Research Service evaluated the carbon tax and found that a minimal tax of "$20 per metric ton of CO2 would generate approximately $88 billion in 2012, rising to $144 billion by 2020... this estimated revenue source would reduce the 10-year budget deficit by 50%." (In August, Australia enacted a carbon tax.) A U.S. carbon tax has the support of both environmentalists and business leaders (including New York City Mayor Michael Bloomberg and Rex Tillerson, ExxonMobil CEO). It would be a rare political two-fer that produces massive revenues while lowering emissions of CO2.
3. Reduce Defense Spending: In 2013, sequestration would cut $55 billion from the defense budget -- roughly 11 percent. As one might expect, the Secretary of Defense and other pro-defense voices screamed that such a cut would be "a disaster for national defense." Nonetheless, many Washington pundits doubt that there would be a dramatic impact. They point to reports of waste in defense spending and note that the U.S. is in the process of winding down two wars and defense expenditures -- which have almost doubled since 2000 -- should be expected to decline. Former assistant secretary of defense Lawrence Korb observed,
Sequestration certainly is not a smart way to cut the defense budget... but it also means the Pentagon will be spending more in 2013 after sequestration than it did in 2006, at the height of the Iraq war... Moreover, the United States will still account for 40 percent of the world's military expenditures.
Former Congressman, White House Chief of Staff and current Mayor of Chicago Rahm Emanuel once observed, "You never let a serious crisis go to waste... it's an opportunity to do things you think you could not do before." The fiscal cliff crisis presents progressives with an unprecedented opportunity to address income inequality, global climate change, and rampant military spending.