Bradley Belt and Phillip Swagel, veterans of the Bush administration, and Jared Bernstein, who served as Vice President Joe Biden’s chief economic advisor, and William Gale have a post-cliff proposal for forestalling a sharp economic contraction:
To avoid a recession, we propose temporary tax and spending measures to boost near-term demand without making choices between the agendas of the two parties. We see this last point as essential. Getting past the cliff with the least damage to the economy requires not making choices about fundamental long- term issues in a lame-duck setting. This means that our proposal doesn’t separate upper-income tax brackets from other tax rates as sought by President Obama, but neither does it extend all rate cuts as sought by Republicans. Instead, all tax rates go up.
More specifically, they call for:
(a) a $200 billion tax refund, with rebates that will phase out for higher-income households;
(b) $50 billion on infrastructure, school construction, and scientific research;
(c) $50 in transfers to state and local governments;
(d) (of course) a patch to the AMT and a doc fix;
(e) and “turning off” the sequester.
The proposal resembles the strategy outlined by Peter Orszag:
One path through this brick wall for the Administration would be to allow all the tax cuts to expire and thereby escape the intractable debate over those extensions. In the cacophony that follows, the Administration could then come back in early 2013 with a tax-reform proposal that reduces taxes (compared to the level with the expired tax cuts) disproportionately for middle- and low-income families. If the tax cuts are designed to be universal, even if they are much more progressive than the Bush tax cuts, it would presumably be harder for Republicans to vote against them. One example of this strategy would be to combine a much larger payroll-tax holiday with an increase in the standard deduction. This would provide a substantial tax cut for everyone who works, but the effect would be progressive since payroll taxes represent a larger share of income for low- and middle-income workers than for high-income workers. As with the structure in place for the current payroll tax cut, general revenue would backfill the Social Security and Medicare Part A trust funds, so that the programs would not be harmed by the tax cut.
It is not entirely unlikely that we will soon be looking to proposals like this one to shield low- and middle-income households from substantial tax increases.