11/13/12 – Trial Balloons on the Fiscal Cliff

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Nov 13, 2012 9:26:46 AM

and tagged Fiscal Cliff, Market Updates, Politics and the Economy

Leave a comment

Nothing concrete to report on today, but the discussion continues to get more interesting. One article in particular that is worth a look is an op-ed piece on page 9 of the Financial Times (FT), “How the US should avoid falling off the fiscal cliff.” It was written by Glenn Hubbard, current dean of Columbia Business School, former chairman of George W. Bush’s Council of Economic Advisers, and an economic consultant to the Romney campaign. He has some credibility when it comes to representing the Republican economic point of view.

And his points are both largely typical of that point of view and economically sensible—raising revenue is about raising average tax rates, not marginal rates; spending cuts should be a larger part of the solution than tax increases for growth reasons. It’s when you take a closer look at the details that it gets interesting. Let’s go to some direct quotes. Hubbard writes:

  • “There are ways to raise revenue without increasing marginal rates. Tax deductions should be scaled back, especially in the areas of mortgage interest, charitable giving, and employer provided health insurance.”
  • “The first step is to raise average (not marginal) tax rates on upper-income taxpayers. Revenue increases should come first from these individuals. This means closing loopholes.” He then goes on to discuss limiting deductions overall.

These are hardly typical Republican talking points—despite Romney’s mention of both during the later stages of the campaign—and they essentially amount to a recognition that taxes on the wealthy have to increase. The piece inspired a front-page story in the same issue of the FT titled “Republicans shift stance over taxing the wealthy.” I think the headline way overstates the shift—note that Hubbard is not actually a policymaker, nor an elected official—but there is no doubt that a shift is occurring. Bill Kristol, another Republican intellectual, is also quoted in the article, stating that the party should not “fall on its sword” for the sake of millionaires.

We are starting to see the outlines of a deal emerge. The New York Times has a front-page article, “Democrats Like a Romney Idea on Income Tax,” that talks about the deduction cap idea mentioned favorably by Hubbard. Marginal tax rates, for long a deal breaker, may come off the table in favor of higher effective tax rates combined with potentially lower marginal rates. Could be a win for everyone.

I am very encouraged to see this much in the way of trial balloons floating so early in the process. Although the expectation is still for a last-minute deal, and although the interest groups on both sides are still gearing up to try to push maximalist positions through, the political and economic realities—not to mention the good of the country—are pushing for a compromise. It sounds like there are some real good-faith efforts under way to define exactly what that would mean.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®