The case for jumping off the fiscal cliff

September 19, 2012

Douglas Elliott doesn't want the United States to jump off the fiscal cliff. But he can imagine Congress reaching a point at which it may be the best of a set of very bad options.

(Behrouz Mehri - AFP/Getty Images)

"The hardest part of this is persuading Republicans to allow taxes to be higher than they are now," Elliott, a Brookings fellow and former investment banker, said at a panel Wednesday morning. It was the single biggest impasse that derailed last year's supercommittee: Republicans refused to sign onto a plan that raised taxes and Democrats refused to sign onto a plan that didn't. If negotiations go nowhere this time around, going over the cliff may be "the only thing we can do to change the environment enough to break the deadlock," he said. "That may be in the end what we can do to get in a situation where we can rebuild."

Since the Bush tax cuts will expire automatically, Republicans won't technically have voted for tax increases if we go off the fiscal cliff—the expiration of the Bush tax cuts and other tax breaks and the triggered sequester cuts that are all scheduled to take effect after Dec. 31. Instead, both parties would presumably come up with a deal that would restore some, though not all, of the Bush tax cuts as part of a larger bargain. That would mean they could call it a tax cut.

That's the reason that folks like William Gale have explicitly advocated for passing over the fiscal cliff. "Going over the cliff may be the only way to get Republicans to negotiate any meaningful tax increases, given the no new taxes pledge," said Gale, Brookings' chair of Federal Economic Policy and a former George H.W. Bush economist.

In fact, groups like the Center for Budget and Policy Priorities have stressed that the fiscal contraction won't happen all at once, so legislators have a little more wiggle room than the image of a "fiscal cliff" suggests. The income tax changes, for instance, won't take effect until taxpayers file their 2013 taxes after the calendar year, and the sequester cuts will take effect over the entire course of the year and subsequent years. So going over the cliff—which the CBPP characterizes instead as a "fiscal slope"—could be worth it if a good deal could emerge as a result.

Both Elliott and Gale are less sanguine about going over the cliff: Both warn there could still be serious economic consequences if the deadline passes, even if a reasonable deal comes together thereafter. "Confidence is going to be shattered," Elliott said. Gale believes that lawmakers should only be willing to go over the cliff if they also pass a temporary stimulus package to prevent the economic fallout—one that includes "payroll tax cuts, infrastructure investment and aid to the states."

Ideally, however, Congress will come together before Dec. 31 "so we don't have to go splat first," Elliott concludes.

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