Ramesh, the second point your reader makes below — that broad-based tax increases will help Americans realize the true cost of enlarged government — is one I echoed on Friday in a piece arguing that no deal is better than a bad deal:
Remember that continuing to spend money we don’t have isn’t free. Deficit spending is a tax increase on our children and our grandchildren, and on people who have done the responsible thing and built up their savings. Going over the cliff means that the accounting gimmicks are over. No more “temporary” this and “temporary” that, so that Congress can pretend to be more fiscally responsible than it’s actually being. Going over the cliff means that a broad swath of Americans will be required to pay for the enlarged government that they voted for in November. I don’t think that’s such a bad thing.
Much of the Republican behavior on Capitol Hill has been driven by fear of how the electorate will view Republicans if they don’t continue to pass temporary tax cuts. But reducing the deficit will have to happen sometime, and whenever it happens, it is likely to have some negative impact on the economy. If Republicans don’t want to reduce the deficit two years away from the next election, under a Democratic President and a Democratic Senate, they’ll never reduce the deficit. The time to reduce the deficit is now, before a real fiscal crisis emerges, one that makes Greece look like a picnic.
We achieve historically significant deficit reduction by going over the fiscal cliff, on the scale of $6 trillion or more over ten years. In 2013, with a much more manageable budget deficit, Republicans can pair real, growth-oriented tax reform with commensurate spending reductions. Because middle-class taxes will go up under the fiscal-cliff scenario, people who currently have less incentive to support spending reductions would have more reason to next year.
But so long as the U.S. has the most progressive tax code in the OECD, something Speaker Boehner’s “Plan B” would exacerbate, achieving a consensus for entitlement reform will get harder and harder.