Thursday, January 3, 2013

Two Bright Spots in the Fiscal Compromise

“There’s almost no economic theory under which the fiscal cliff deal could be called a success,” Reuters wrote this morning in summarizing a Washington Post analysis of the “fiscal cliff” compromise. We are all losers with what the United States’ current fiscal approach does to the economy, and the latest stopgap compromise doesn’t change that, but there are two bright spots, at least, in the latest changes.

  • More than anything else in the tax code, the reduced capital gains tax rates since 1998 are the cause of the continuing economic doldrums since then. The capital gains rates are still too low, but they are no longer ridiculous, and there is reason to hope that they won’t completely squeeze the life out of the economy at their new higher rates.
  • The estate tax in its previous form allowed billions of dollars to be sucked out of the useful economy not just for generations at a time, but in ever-increasing amounts as time went on. The increase in the tax rate is just enough to tip that balance, so that the money lost to the useful economy is diminished, if only slightly, from one generation to the next. Most people think the estate tax doesn’t matter because it only affects estates larger than $10 million, but it is precisely those huge sums of money, in the tens of millions, that matter the most in terms of keeping the economy alive.

It is hard to celebrate when the country is technically in bankruptcy and has just had to pick itself up after stumbling over a “fiscal cliff,” but these structural improvements in the economy are no less valuable for having come along in the chaos of a crisis situation.