How to approach the fiscal cliff

James Capretta offers four guidelines for navigating fiscal cliff negotiations. On the whole, I think they are sensible suggestions and, at a minimum, worthy of consideration.

First, “acknowledge the economic and policy risks of going over the cliff.” It’s possible that the looming tax increases and spending cuts wouldn’t send the U.S. economy into a recession. It’s also possible that massive cuts to the military budget wooudn’t produce adverse consequences to the national security and ability to protect our national interests. But we shouldn’t count on being this lucky.

Second, “remember the White House has more to lose.” In the short term, it’s quite possible that voters would mainly blame Republicans if we go over the cliff. Ultimately, though, President Obama cannot afford even a shallow recession in his second term, and presumably he understands this.

Third, “be practical and strategic on taxes.” Being practical means recognizing that, given the outcome of the election, a bigger tax load for the wealthy is inevitable if we are to avoid going over the cliff. Being strategic means avoiding measures that damage the long-term goal of a simpler, more pro-growth tax code. For example, revenue can be raised by limiting available deductions, credits, and exemptions for very high-income households, rather than raising their tax rates.

Capretta also advocates pushing for an extension of payroll tax relief for working Americans, which Obama opposes. This would (a) put Republicans on the side of working Americans and (b) create pressure for social security reform.

Fourth, “be clear on entitlement reform.” This means insisting that there can be no deal on long-term taxes without far-reaching reforms to health-entitlement programs. And for Capretta, far-reaching reform includes, among other things, the revision and retrenchment of Obamacare. Because that law sets in motion the largest entitlement expansion in a generation, Capretta argues that it’s far better to scale the program back now before it gets started than to wait and hope it can be scaled back later.

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