Slouching to the fiscal cliff

After months of breathless discussion, it's come to this: Does anybody care? Photo: Associated Press

WASHINGTON, DC, December 26, 2012 — President Obama is on his way back to Washington to help resolve the fiscal cliff, but as of today, the House remains on vacation. Aides to House Speaker John Boehner point out that there’s nothing for them to do until the President and the Senate give them something to vote on, and that doesn’t seem likely to happen this week.

The Senate is returning to take up the challenge. White House aides have been working with Senate Majority Leader Harry Reid to work out a compromise that they think can get through the House, if only Boehner will allow a vote, but they haven’t talked to Minority Leader Mitch McConnell, and that’s a problem.

No fiscal cliff deal will get through the Senate if McConnell opposes it. Senate rules make that all but impossible. At the same time, no compromise acceptable to Reid and Obama will fail to raise tax rates on the “wealthy,” however they’re defined. McConnell, who will be up for reelection next year, will not want to face a conservative challenger for his seat after making that compromise. McConnell won’t want to be seen negotiating a bill that includes tax hikes.

So McConnell and Senate Republicans wait for Obama and Reid to move first. And now what was a “problem” becomes truly odd.

For all the breathless discussion of the fiscal cliff over the last two months, Obama and the Senate are preternaturally calm. There’s none of the panic that seemed to drive Boehner to push Plan B. There are no high-level negotiations going on between the opposing parties. There’s no sense of urgency emanating from Washington at all.

There’s no urgency because even if we run off the cliff, we still have time to run back to the edge, or negotiate the terms of just how fast and hard we will fall. Senate Democrats are talking about bringing us down with a tax bill, their own version of Plan B. It’s a repeat of a bill the Senate passed in July, and it would extend the Bush tax cuts for the bottom 98 percent of taxpayers for a year. It would return the estate tax to 55 percent on estates above $1 million, and raise capital gains and dividend taxes to 20 percent from 15 percent.

If that sounds bad, it’s worse. The bill would do nothing else. It wouldn’t extend unemployment insurance or the payroll tax cut. Like Plan B, it wouldn’t stop the sequester. It would result in higher taxes for just about everyone due to the expiration of the payroll tax cut, producing tax hikes between $1,000 and $2,000 for households earning between $50,000 and $100,000.

This is clearly worse than Boehner’s Plan B, and the odds are remote that McConnell will ever let it get to the House, let alone that Boehner will let it come up for a vote. Even if the payroll tax were extended, the Senate plan would be an icy blast of austerity.

We have some time before tax hikes and sequestration start to bite; we have less time before two other problems hit home: the Alternative Minimum Tax, and the debt ceiling.

The AMT was designed to ensure that high-income households would pay some minimum level of tax at an almost flat rate. “High income” was lower in 1982 when the AMT was created, and the AMT thresholds weren’t designed to go up with inflation. Congress has adjusted them over the years, but if it fails to act on the fiscal cliff, the AMT will hit 30 million middle-class households with higher income tax bills, and even millions who will be untouched (up to 100 million) will be forced to wait until the IRS can change its processing procedures before they can file their tax returns, perhaps in March. If you’re due a tax refund, you’ll have to wait for it.

The debt ceiling is coming at us like a freight train. On Monday the federal government will hit its credit limit. Treasury Secretary Timothy Geithner will be able to take steps to continue funding government operations for two months after that. The government can also borrow more money from government pensions. Congress won’t have to vote on raising the debt ceiling Monday, but that’s coming quickly.

Congress and the President have known all this was coming for years. The fiscal cliff was deliberately created by Congress over a year ago to force itself into action to deal with the country’s mounting debt.

It failed.

The action they’re engaged in now has a cartoonish quality to it. Obama and Congressional Democrats seem insouciant about this, perhaps because they hope that Republicans will fall faster off the cliff than they do. They have no strong philosophical objection to falling, either. Higher taxes on everyone isn’t a starting position that bothers them nearly as much as it does Republicans.

If we go over the fiscal cliff, defense spending gets cut, taxes go up, and polls say that Republicans will get more of the blame. Senate Democrats and the President won’t consider that a bad outcome.

Taxes matter to hiring, investment and consumption decisions, but they aren’t all that matters. Certainty and stability matter more, and those will take a beating even if a bargain is reached in the next week or two. Financial markets won’t react well to going over the cliff, and it’s almost certain that business investment and hiring have already slowed due to this impasse. Business and consumer confidence will both take a hit.

Government performance on the fiscal cliff bodes ill for negotiating a resolution to the debt ceiling. As with the fiscal cliff, the parties have drawn hard lines. Obama insists that he won’t negotiate on the debt ceiling, and GOP leaders have made it clear they expect a dollar of spending cuts for every dollar they raise the debt ceiling.

The Democratic advantage on the fiscal cliff could be negated if Republicans link the debt ceiling to the fiscal cliff. They could wait out Republicans while taxes rise, but not while we collide with the debt ceiling.

Both parties, but especially the Republicans, are likely to feel badly pressured by the markets and angry voters. That means that they’ll accept bad compromises and bad deals. Making a decision under pressure is never a good move. The odd fact here is that the parties almost deliberately set themselves up for that situation. America will pay the price.




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Jim Picht

James Picht is the Senior Editor for Communities Politics and teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years working in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He returned to Ukraine recently to teach principles of constitutional law and criminal procedure at several Ukrainian law schools for a USAID legal development project. He has been writing at the Communities since 2009.

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