Rising house prices and a booming stock market are driving up household net worth, which should boost spending. The housing sector is rebounding. Corporations are sitting on a huge pile of cash, which means that there’s lots of room for investment and hiring once businesses are convinced that the recovery is for real.
With all this good news, why would Washington want to throw sand in the gears of the economy? But it is, big time.
The deal to avert the fiscal cliff let payroll taxes rise by 2 percentage points, which cut household after-tax incomes and is depressing consumer spending. The insane sequester will hurt the economy by reducing federal workers’ pay and reducing employment as federal hiring comes to a standstill and contractors have to lay off workers (or cancel hiring plans).
There is a time to cut government spending, but it’s not now.
There is, however, a potential bipartisan path out of this morass. Republicans and Democrats are each right about some big things that seem to divide them. Democrats are right that taxes will need to increase. The retirement of the baby boomers means that there will be unprecedented demands on government. The tax level that sort of worked for the past 30 years won’t be adequate to pay the Social Security, Medicare, and Medicaid (which covers half of nursing home care) that we’ve promised baby boomers, even under the most optimistic assumptions about cost controls. And Republicans are right that we must slow the out-of-control growth of entitlement spending–especially for government healthcare programs.
The President has signaled willingness to take on entitlement reform, over objections of some of his caucus. He should be able to win over a substantial number of Democrats with a simple argument: if we do not control health care spending, it will crowd out everything else that government does.
The GOP has dug their heels on additional tax revenues, but tax reform that curtailed tax expenditures, cut tax rates, and raised net revenues still seems like a possibility. Republicans really should favor this. Spending programs administered by the IRS do as much to increase the size and scope of government as direct spending programs, and deserve the same level of scrutiny.
Serious tax reform would take a couple of years, but that is a plus. If the economy keeps recovering, modest revenue increases starting in 2015 would be well timed. Similarly, the effects of serious entitlement reform would take many years to have much effect on the budget, but they will solve the real budget problem, which is long term (and won’t hamper the economic recovery).
Congress should cancel the irrational sequester and instead enact policies that could help speed up the recovery. Congress and the President should agree to pair tax reform with entitlement reform and get down to work on both.
Or law makers can continue to sabotage the economy and hope the other side gets blamed for the resulting economic carnage.
I know the smart money is on the latter outcome, but I’m hoping that for once smart policy will prevail.
Len Burman is coauthor with Joel Slemrod of Taxes in America: What Everyone Needs to Know.
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