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There are several reasons why the fiscal-cliff agreement represents a positive policy development.
The most important reason is it locks in most current marginal tax rates. Without the agreement, income tax brackets would have moved sharply higher for all taxpayers. And, since the agreement makes most income tax rates permanent, it significantly reduces the odds of further tax increases.
In spite of the latest agreement, individuals and businesses will have to adapt to higher tax and regulatory burdens in the period ahead. Millions of individuals will discover how promises to “tax the rich” somehow increase their own taxes.
The “rich” will adjust their finances to avoid higher rates. Businesses will shift the cost of new regulatory burdens to their customers and employees. These adjustments will reduce productive activity and lower living standards.
However, the economic damage would have been greater if there had not been an agreement.
Many have complained the agreement does nothing to contain federal spending. That’s true.
But by taking the threat of higher tax rates off the table, politicians will have a freer hand at containing future spending.