The Fiscal Cliff Deal: Mercatus Center Scholars React

As the nation narrowly averts the dreaded “fiscal cliff,” can Americans finally exhale with the knowledge that Washington’s last-minute deal is a good deal for them?  

Mercatus Center at George Mason University scholars suggest the following key questions to help gauge whether the fiscal cliff deal is a real step toward improving the nation’s dire fiscal outlook. Does the deal:

• Include a credible commitment to address the key drivers of future spending and debt—specifically Medicare, Social Security, Medicaid—with meaningful reforms that begin in the coming fiscal year?
• Include real, across-the-board discretionary spending cuts (i.e. enforces the sequester or cuts discretionary spending by an equal amount) that begin in the current or coming fiscal year?
• Include a plan to fundamentally reform the tax code to make it more simple, equitable, efficient, predictable, and competitive? Acknowledge that raising taxes cannot fix the problem of unsustainable spending, deficits and debt?  

Mercatus scholars react to fiscal cliff deal, below.

Taxes
Jason Fichtner, senior research fellow:
“The nation’s federal revenue system needs fundamental reform to make it simpler, more equitable, more predictable, and more competitive. This deal doesn’t go far enough and may actually relieve pressure on Congress and the president to begin real reform of the tax code.

“The focus of this debate was misguided from the start. Instead of attempting to raise revenue by increasing someone’s taxes, we need to focus on increasing economic growth, saving, and investment; a larger economy will result in larger tax revenue. The bottom line is that we don’t just need more revenue—we need a better revenue system.”

Veronique de Rugy, senior research fellow:
“This deal fixes exactly nothing. The nation is on a fiscal collision course, and the only thing Washington could do is raise taxes on a few rich people—a symbolic measure that won’t raise much revenue, and won’t reduce the size of government today or tomorrow. In fact, it will make it easier for the government to keep on growing.”

See also:
Increasing America’s Competitiveness by Lowering the Corporate Tax Rate, Simplifying the Tax Code
Uncertainty and Taxes
Why the United States Needs to Restructure the Corporate Income Tax
Lessons from the 1986 Tax Reform Act

Entitlements
Charles Blahous, senior research fellow and public trustee for Social Security and Medicare: 
“This legislation successfully resolves the uncertainty in the tax code; now it’s time to deal with the even greater fiscal problems of deficits and spending growth.

“The value of making key provisions of income tax law permanent is considerable, although the legislation contains a disguised but substantial marginal rate increase affecting those with incomes above $250 K (singles) and $300 K (married couples) through its restoration of PEP and Pease provisions.

“Above all, it’s critical no one conflates averting the near-term fiscal cliff with averting the fiscal crisis that looms larger every day Congress and the Administration fail to deal with the unsustainable growth of spending that is concentrated in four programs—Social Security, Medicare, Medicaid and so-called ‘Obamacare’.”

See also:
The Fiscal Consequences of the Affordable Care Act
Eight Common Sense Suggestions for the Fiscal Discussions
Blahous on Social Security, Medicare in Fiscal Cliff Negotiations

Matt Mitchell, senior research fellow:
“For all the hand wringing and concern about the fiscal cliff, the fiscal future is far bleaker. Auto-pilot spending programs are on course to take federal spending as a share of GDP to twice its historical average. This is not economically sustainable.

“The longer Congress and the president wait to make necessary spending reforms, the more drastic they will need to be.

“If politicians continue to resist change, change will be thrust upon them and it will be extraordinarily painful for everyone: precipitous spending cuts, massive tax increases, dangerous inflation, or some combination of the three. It will make the fiscal cliff look like a fiscal bump in the road.”

See also:
What Went Wrong With The Bush Tax Cuts?
The Real Debt Crisis: What Can Be Done?

The Sequester
Veronique de Rugy, senior research fellow:
“The whole point of this deal was to avoid spending cuts—even those spending cuts both sides agreed to in the BCA law. If anything, this deal is a big step backward for addressing the crisis of unsustainable spending and debt.

“Congress and the president agreed to the sequester in exchange for a $2-trillion increase in the debt limit last year. They got their debt-limit increase. But when it was time to enforce the spending cuts, both sides readily agreed to punt.

“We’re not even talking about real spending cuts—the sequester would only reduce the projected growth of spending. According to the CBO, even with the sequester, discretionary spending would still grow between 2013 and 2021—just at a slightly slower pace.

“It is true that the spending sequester won’t make a dent in our spending or debt problems. But enforcing it would have at least signaled a commitment to get spending under control. We didn’t even get that.”

See also:
Sequestration is Only The First Step
BCA Sequester Doesn't Make a Dent in the National Debt
Re: Something for Nothing
We Can't Have Low Taxes and Big Government
Let's Return to Clinton Spending Levels, Too