Should We Jump Off the Fiscal Cliff? | Capital Commentary

Should We Jump Off the Fiscal Cliff? | Capital Commentary by Prof. Todd Steen.  MGB: The automatic spending cuts and the already booked defense cuts resulting from the end of the Iraq and Afghanistan wars were meant to be offsets for making a portion of the Bush tax cuts permanent for the middle and working classes.  The problem is that one party refused to do so.  It was never intended to let all the tax cuts expire and do spending cuts as well.  While some entitlement cuts may be made, they are mostly designed to preserve the Medicare Part B and D programs by raising premiums or paying for increases by booking cost savings implicit in health care reform but which were not able to be estimated when the Law was passed.  This leaves the question of increased revenues from either a consumption tax, higher taxes on the wealthy or some combination of the two (possibly with working class families not having to file taxes at all in the future while still getting a child tax cut as a benefit through employers).

The question of who is really responsible for paying back future debt is crucial to answering the question.  As it stands now, the debt is backed by the ability to do an income tax - with the payment of those taxes being skewed to the rich.  Therefore, temporary tax cuts in a deficit environment can be seen as a future income tax increase.  Using a consumption tax to pay down debt is self-defeating, because it shrinks the economy where income taxes do not - especially on dividends and capital gains.  Indeed, the current low levels of these taxes give an implicit incentive to cut labor costs and have corporate management be rewarded with either stock or wage bonuses to pocket some (if not most) of the savings (as it can be argued that labor costs savings have no impact on the need to pay normal dividend returns).  If you buy the logic of these statements, the way forward is clear - even to wealthier taxpayers - since it is not all of our children who bear the burden of the debt, but primarily the children of the debt.  It is all of us who work or want to work, however, who bear the burden of tax cuts on the rich.

By the way, the answer is that, yes, we should jump.  Employers will make up the income loss to taxes for most working families and the rich will simply pay.