Explaining the US "fiscal cliff"

From the Economist comes a good video on what is the fiscal cliff all about:

The Wall Street Journal offered their own interactive feature called "Make your own deficit-reduction plan".

So I did. Feel free to check it out here. Please be aware that I was being politically careful when I was making this "plan". On the tax side I extended the Bush tax cuts for middle income families, and focused mostly on easing out tax deductions (here is where I agree with the Economist in pointing out to eliminate tax breaks rather than increasing the tax rates - recall an earlier text on taxes). I've also found this part interesting: "Tax greenhouse-gas emissions by setting up a program to force polluters to buy a permit for each ton of carbon dioxide emitted into the atmosphere". Sounds like a good Coase solution to an externalities problem, particularly if these permits could be bought and sold on the market. This, I feel, is one of the best possible solutions to combat pollution. And it'll reduce the deficit; win-win! 
All together, the tax revenue increases could generate around $600bn over then next 8 years (mostly through removing tax loopholes and the expiration of tax cuts on high income families - the two unavoidable solutions in the fiscal cliff negotiations). 

On the spending cuts, I focused mostly on reducing pay rises for federal employees and  some of the reductions already included in the fiscal cliff. Not the most popular of solutions but it would decrease the deficit by $169bn. Perhaps one can be more generous here, since according to Krugman, a stable or declining debt to GDP would be possible even with a $400bn deficit (meaning that we don't need to aim to balance the budget). 

But I went further, and made savings of $350bn in cuts to benefits and entitlements, without repealing Obamacare (a politically sensitive issue), at least not all of it - see here why. I focused mostly on raising the eligibility age for Social Spending and Medicare and how to change the way these are calculated so that they grow more slowly. Once again, this is a delicate issue and it has much wider implications than a deficit-reduction plan, or the fiscal cliff. It's a question of the US welfare state model all together, or the infamous 47 percent

In sum, I managed to balance the budget by 2020 - hey, I'm even better than Bowles and Simpson!


  1. Not a big fan of carbon credits. They are unweildly to say the least, and open to politics and fraud. If it is considered a national policy to decrease the use of carbon fuels then it is easiest to just tax them directly. You can tax the carbon based fuel sources and use the proceeds of the tax to lower other taxes in order to lesson the impact on the economy.

    My own plan for deficit reduction would include some targeted cuts and then an across the board cut in everything. Followed by a freeze in spending. The cut would not have to be great, only about 5%. And of course the qualification age for entitlements has to be raised.

    1. The trade in permits is something I always found particularly interesting as a potential pollution solution, but perhaps you're right, it works well in theory, but wouldn't work so well in practice. Your idea is a Pigouvian tax, like the one Greg Mankiw is constantly proposing, which is also a very good way to remake the tax system. Particularly if this tax would in fact reduce the need for other taxes in the economy (which is questionable but it's worth a shot)


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