Daniel Mitchell | The fiscal cliff’s not the problem, entitlements are

Washington is consumed with wrangling over how to deal with the specter of big automatic tax hikes that will hit Jan. 1 when the Bush tax cuts expire. It’s also the day that the sequester kicks in, which is the budget-wonk term for an automatic process that will slow the growth of government spending over the next 10 years.

This is the so-called fiscal cliff; it’s a fight that has important implications, particularly since some of the tax increases will have a significantly harmful impact on incentives to work, save, invest and create jobs. In a competitive global economy, for instance, it is bizarrely self-destructive to increase the double taxation of dividends and capital gains.

And keep in mind that taxpayers already are getting thrown down a steep hill. A bunch of ObamaCare-related tax hikes are also set to take effect in January, most notably higher tax rates on investment. And the payroll-tax holiday will almost surely expire as well; it may have been an ineffective gimmick in terms of job creation, but it did make a difference for family budgets. Plus, millions of Americans face the specter of getting dragged into the indecipherable swamp of the Alternative Minimum Tax if lawmakers don’t take action.

This is all bad news, but it is not a crisis. If we go over the cliff, it simply means the economy will grow a bit slower and politicians will spend a bit more money. And the sequester actually would be (modest) good news, since it means the burden of government spending would be “only” $2 trillion higher 10 years from now, rather than $2.1 trillion higher.

And even if Obama prevails in the fight, that simply means that we get a different mix of tax hikes and spending rises at a faster rate. Sure, that’s bad for the economy, but it’s not the end of the world.


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