The Fiscal Cliff - What Could be Done About it?

America faces a combination of tax rises and spending cuts that could derail their recovery. Here's a look at how they could deal with it.

The end of the George Bush tax breaks, effectively tax increases, and large spending cuts could damage the US economy to the tune of 5% of GDP , according to estimates. This has dominated the debate in the election run-up, particularly in conjunction with the concern over debt reduction, and most political commentators are pretty certain that something will be done about it post-election, the question is what? This artcile from Bloomberg has come up with a bipartisan approach to avoid the potential damage:

• An increase in the retirement age from 66 to 69
• More copayments and deductibles with Medicare to discourage overuse
• Increasing taxes on the wealthy, as proposed by Warren Buffet and even uttered quietly by Mitt Romney
• A very interesting recommendation to link Cost of Living Allowance to chained CPI which is far below CPI as it takes into account cheaper substitutes

One thing is certain, even if Obama wins, America won't follow in France's who unveiled their budget for 2013 . The focus of the French budget was based largely on revenue raising from taxation on the wealthiest with only one-third of the deficit reduction (10bn Euros) coming from cuts in government spending. French tax increases focused on the very rich:

• 75% income tax on earnings over 1m euros
• 45% income tax on earnings over 150,000 euros
• Assets of more than 1.3m euros will be taxed at 1.5%
• The reduction of tax exemptions for loan payments by large corporations

These two contrasting ways to deal with deficit reduction should provide for very stimulating classroom discussion.