The term “fiscal cliff” refers to the sharp drop in the 2013 budget deficit that would result from policies in current law. Thanks to a deal Obama cut with Republicans in 2010, the Bush tax cuts — and dozens of other tax provisions — are set to expire in December, raising taxes for virtually every U.S. household next year.
Meanwhile, during the debt-limit showdown last summer, lawmakers approved a plan to implement $110 billion in automatic spending cuts next year. A legislative “supercommittee” appointed to find an alternative deficit-reduction strategy disbanded without reaching agreement.
Republicans say Democrats are responsible for the impasse, noting that GOP members on the supercommittee offered to raise revenue through an overhaul of the tax code.
“We were on the record saying we would agree to a conventionally scored tax increase if they would clear out the tax code, make it fairer, flatter and simpler and begin to take us off the road to bankruptcy on entitlements. And they weren’t willing to do it,” said Rep. Jeb Hensarling (R-Tex.), the GOP supercommittee chairman.
Murray, who served as the panel’s Democratic chair, argues that her party was willing to tackle entitlement costs. But the GOP’s tax offer was a “bait and switch,” she is expected to say Monday, that would have slashed rates for the rich while generating too little cash to reduce the deficit.
With less than four months until the election, threatening to go over the cliff is a dicey political strategy. Democrats acknowledge that there is a fine line between appearing to stand firm and appearing to take unnecessary risks with the economy. Privately, some Republicans compared it to the debt-limit fight, when congressional approval ratings plummeted after conservatives risked an economy-shattering default to force cuts in government spending.
Democrats say this case is different. Unlike default, the effects of going over the cliff would be neither immediate nor permanent, aides said. An analysis by Chad Stone, an economist at the left-leaning Center on Budget and Policy Priorities, casts the cliff as more of a “slope,” with “only a fraction of the impact occur[ing] in the first month or so.”
“This is not a Wile E. Coyote moment where you have the economy plummeting on Jan. 2,” Stone wrote. “You have some time to implement policy to address the weak economy in the short term and the deficit in the long term.”
In a recent report titled “There Are Worse Fates than Walking off the Fiscal Cliff,” analysts with the Carlyle Group argued that the cliff “would be a near-term disaster” but that simply extending current tax and spending policies would fail “to address increasing indebtedness” and “could actually represent the worst long-run outcome.”
Some Republicans rethink
Given the stakes, some Republicans are rethinking their opposition to higher taxes. In recent days, Sen. John McCain (Ariz.) and other GOP defense hawks have been talking with Democrats about raising cash by “closing loopholes” to replace scheduled military cuts.
“If you said ‘John McCain, are you for increasing taxes?’ the answer is still no,” McCain said, pointing to federal subsidies for ethanol as an example of a loophole that could be closed without “raising taxes.” He added, “We get into such semantics.”
Democrats have shown little interest in a deal, however, preferring to keep the spending cuts in place as an additional point of leverage for the post-election fight.
That’s good strategy, said Erskine Bowles, the Democratic chairman of Obama’s deficit-
reduction commission, who is still trying to build support for a framework to raise taxes, overhaul entitlement programs and rein in the national debt.
“You got two guns: One is the tax cuts, and the other” is the spending cuts, Bowles said in an interview. “Until I can get a framework agreed to, I wouldn’t holster those guns,” he added.