Ihave fond memories of summer trips to Perkins Cove in Ogunquit, Maine – for lobster but also for the scenery along Marginal Way, a narrow path along a cliff by the beach. Getting down to the pleasant waters requires navigating a narrow path down the rocks.
And so it is, figuratively speaking, with tax policy and the fiscal cliff. A sensible approach can lead us to the water: less uncertainty and stronger growth. But we must first define the path, then find the way down.
US policy makers must begin by realising three points. First, raising revenue is about raising average tax rates, not marginal tax rates, as Barack Obama’s campaign suggested. Higher marginal tax rates distort behaviour and reduce activity. 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.