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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, August 23, 2012

WSJ: The 2013 Tax Cliff

Tax CliffWall Street Journal editorial:  The Cliff the Keynesians Built:

The nearby table compares current tax rates with those that arrive next year with the tax cliff, as well as Mr. Obama's budget proposals and Mitt Romney's tax reform plans. Mr. Romney is proposing an across-the-board rate cut, while Mr. Obama would keep rates the same only for those earning less than $250,000. Everyone else would see a huge tax increase, one of the largest in history.

Republicans are pointing to the CBO report as proof of Mr. Obama's policy failure, and it is. But rather than gawking at the potential for another recession, they ought to explain the folly of "temporary, targeted" tax and spending stimulus. The fleeting tax elixir does little to change incentives to work or invest because everyone knows its impact is temporary. It also creates tremendous uncertainty as expiration nears, which can also harm incentives and growth.

The problem is political, but more important it is intellectual. The Keynesians and their allies who have dominated tax policy for most of the last decade (the 2003 bill excepted) need to be exiled back to Harvard, Princeton and Wall Street. And the Romney-Ryan Republicans need to understand and not repeat the Bush mistakes of 2001 and 2008.

Instead of "timely, targeted and temporary," tax policy should include lower rates (and fewer loopholes) that are applied as broadly as possible and are permanent. These were the principles that guided the Reagan policy of the 1980s, and they need to be revived.

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I see little reason to expect a repeat of the Bush follies. There is a fundamentally different sense of economics at play in the Romney/Ryan team. It's also worth noting that the temporary nature of the Bush tax cuts was the concession Republicans made to Democrats in order to get them passed at all.

Posted by: tryanmax | Aug 23, 2012 1:28:30 PM

Also, as a point of clarification, the Obama budget proposal is wrongly characterized here. Rather than extending cuts only to those earning less than $250,000 his budget would extend cuts to any earnings below $250,000, effectively extending the cuts to everyone regardless. Granted, in speeches he describes his plan the way you put it, which emphasizes the need to verify everything.

Posted by: tryanmax | Aug 23, 2012 1:32:55 PM

The temporary nature of the Bush tax cuts was because they were passed under reconciiation. Reconciliation bills cannot alter revenues 10 years out.

Reconciliation was necessary because of Democratic opposition, not acquiesence.

Posted by: Anonymous | Aug 24, 2012 8:47:00 AM