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US 'May Have To Go Over The Cliff,' Says Report

by Mike Godfrey,, Washington

05 December 2012

In a newspaper article, William Gale from the Brookings Institution has suggested that the only way to get the United States Congress to implement tax reform and longer-term fiscal consolidation may well be "to go over the fiscal cliff."

In a piece for USA Today, Bill Gale writes that, while, “ideally, the President and Congress would agree to stimulate the economy now and implement gradual, balanced fiscal consolidation over the next decade, … going over the cliff might be the only way to reach that outcome.”

He points out that: “About 90% of Republicans in Congress have tied their hands by signing the no-new-taxes pledge (although a few have recanted recently). Yet polls indicate that 70% of Americans want a package with tax increases and spending cuts. And President Obama won re-election while advocating USD1.6 trillion in higher taxes on high-income households.”

As it would not require a vote, Gale believes that it may well be necessary to suffer the fiscal cliff – involving more than USD600bn of tax increases and automatic spending cuts on January 1 next year if Congress takes no action – to provoke a compromise in subsequent negotiations. He calls this a “silly and potentially dangerous way to make law”, but perhaps the “only path to a balanced fiscal plan.”

However, his forecast is that: “If we do go over the cliff, all is not lost. Going over the cliff is the opposite of ‘kicking the can down the road’. It does the heavy lifting of budget reform by raising revenues, cutting spending and putting the nation on a more sustainable fiscal path. Policymakers could still negotiate further changes - just from a new starting point.”

“Going over the cliff would not have immediate sharp impacts,” he concludes. “But we would need to provide economic stimulus at least large enough to offset the short-term impact of the cliff. … It would be nice if our political leaders could simply negotiate a deal. But … going over the fiscal cliff, coupled with stimulus, will be the only path to a sensible and balanced solution.”

TAGS: tax | economics | fiscal policy | budget | United States | tax reform

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