Debt, Growth, and the Fiscal Cliff Myths

I don't know who wrote the below blog but the people behind Fixthedebt.org are listed on the link below. On the right side is where you can sign the petition. They have collected 311,203 signatures out of 400,000. 

So … how do we reduce the debt, encourage growth, and protect the most vulnerable better than would be achieved by going over the fiscal cliff? This is what Fix the Debt has aimed to achieve since day 1.

Some would have you believe that Fix the Debt is a front for rich guys who don't want the cliff to take effect. Why? Because it would increase their marginal tax rates. Instead they’d want to replace it with a tax reform that cuts their taxes, or so the argument goes.

We want to challenge this assertion head on, right here.

While allowing the fiscal cliff to take effect would achieve deficit reduction, it would do so in the worst possible way economically. The economic effects of going over the cliff would have a negative impact on low income and vulnerable populations. Recessions tend to hurt low income people more than they hurt wealthy people.

What are some of the things that could happen if we do go over the fiscal cliff?

1. Extended unemployment benefits go away
2. Low income housing, title 1 education funding, low-income heating assistance, and numerous other programs servicing the poor get hit by 11%
3. Taxes rise by 3.7 percent for low income earners
4. The unemployment rate would rise in a double-dip recession.

This is why we advocate replacing the cliff with a more gradual, thoughtful deficit reduction plan which avoids economic shock.

It gives people time to adjust and allows policymakers to achieve deficit reduction through thoughtful reforms and to set priorities, such as protecting low income populations, which is a key priority of Fix the Debt. The approach allows for raising revenues through tax reform that is pro-growth and maintains or increases the progressivity of the tax code.  

Our position of warning about the fiscal cliff and calling for replacing the cliff with a comprehensive plan is an economically and substantively sound position — consistent with the goal of thoughtful deficit reduction that can achieve the goals of protecting low income earners and raising revenues in a productive manner.

Interested in learning even more? Below is a detailed piece by CRFB challenging myths about the fiscal cliff.

Tackling the Fiscal Cliff Myths
Originally published by the Committee for a Responsible Federal Budget
http://crfb.org/blogs/tackling-fiscal-cliff-myths

Over the past few weeks we've heard some misleading things about the fiscal cliff and the possible bipartisan plans that could replace the cliff. CRFB President Maya MacGuineas referenced many of these myths in her recent Washington Post piece, but a few of these, and additional misconceptions, are worth addressing in detail. Later this week we plan to dive more in depth into each of the three misconceptions listed below. For now, here is a quick preview.

Claim 1: Those Who Advocate for Debt Reduction Should Love the Cliff
Both Paul Krugman at the New York Times and Matt Yglesias at Slate have made the claim that those who advocate for debt reduction should love the cliff. After all, it does significantly reduce the debt, sending it below 60 percent of GDP by 2022.

We've challenged this myth in the past, as the sudden and blunt nature of deficit reduction in the fiscal cliff would have a devastating impact on the economy. It also ignores tax and entitlement reform that could minimize harm and address the future drivers of debt. For these reasons, the fiscal cliff is the second worst option, only behind kicking the can further down the road and not addressing our rising debt.

Claim 2: The Fiscal Cliff Spares the Poor
Yglesias also claims that going over the fiscal cliff would not hurt lower-income earners very much — rather it is only the high earners that take the hit. This myth may stem from the initial design of the sequester, which exempted many mandatory programs that provide benefits for lower-income households, including Medicaid and food stamps. However, the sequester hits discretionary spending very hard, a significant amount of which goes to programs designed to help low income people, such as low-income rental housing assistance, heating assistance, and Title 1 education funding to name a few.

On the tax side, while the expiration of the upper-income tax brackets has received much of the attention, it's also important to remember that the 10 percent bracket, payroll tax holiday, and expansions of the EITC and the CTC will all expire. In total, taxes will rise on the lowest income quintile by 3.7 percent, with an average tax increase of $412.

Finally, extended unemployment benefits would go away as part of the cliff — a big hit to lower income households given how high unemployment is today. The resulting recession from the cliff would hurt lower income people more than the greater population, further compounded by the expiration of extended unemployment benefits. Clearly the fiscal cliff has serious implications for the most vulnerable in society.

Claim 3: Other Plans to Avoid the Cliff are Much Worse
While neither CRFB or the Campaign to Fix the Debt advocate for any particular plan, some critics argue that plans adhering to its principles would be much worse than the fiscal cliff. But if bipartisan plans like Simpson-Bowles andDomenici-Rivlin are any indication, there are models out there that would be much more targeted and better for the economy than going over the fiscal cliff.

These plans proceed in a smarter way with deficit reduction, backloading much of the fiscal consolidation until the economy has had time to recover. They also take special effort to protect the most vulnerable in tax and entitlement reform. Even with lower tax rates under both Simpson-Bowles and Dominici-Rivlin, the rich pay much more in taxes through the elimination of deductions — in fact, the tax systems under those plans would be far more progressive than only allowing the top two rates in 2001/2003/2010 tax cuts to expire. Overall, these proposals would be better inreducing the debt, encouraging growth, and protecting the most vulnerable than going over the fiscal cliff.