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Over the Cliff We Go

BERKELEY – Unless something unexpected happens, the United States’ many legislated reductions in taxes over the past 12 years – all of which have been explicitly temporary – will expire simultaneously at the start of 2013. American tax rates will revert overnight to their Clinton-era levels.

Some of these reductions were implemented to fight what was seen four years ago as a temporary downturn. Although their supporters wanted to make them permanent, claiming that they were temporary allowed for the circumvention of procedural requirements in the legislative process that Democrats had created in a vain effort to guarantee fiscal sanity.

The immediate increase in tax rates is only part of the story. At the same time, automatic reductions in the defense budget and “discretionary” domestic spending – agreed to by both Democrats and Republicans in the summer of 2011 – will take effect.

Couple these tax increases and spending cuts with the provisions of “Obamacare,” the US health-care reform championed by President Barack Obama, and, as of January 1, 2013, America’s  long-run structural budget deficit disappears. The restored tax rates will, for the foreseeable future, be sufficient to support the US defense establishment, the growing US social-insurance system, and a moderate – albeit inadequate and suboptimal – amount of other “discretionary” federal spending. The US national debt/GDP ratio will be on track to fall from its current level of 75% to 50% by 2035. Moreover, the US will begin running primary budget surpluses – the fiscal balance minus interest payments on existing debt – by 2015.