If Obama can engineer a compromise to avert the cliff with the freshly reelected Republican House, he could set the stage for progress on other second-term priorities, including immigration reform, climate change and investments in education and manufacturing. Such a compromise could also infuse fresh energy into an economic recovery that has suffered from uncertainty over the future of federal budget policies.
“Getting a deal on long-term fiscal soundness is paramount to move forward and to see the economy really keep improving,” said Bill Daley, Obama’s former chief of staff. It will also “give confidence that the political system can address a major issue.”
With Congress scheduled to return to Washington next week for a post-election legislative session, policymakers will have just 49 days to reach consensus. At stake is the fate of dozens of expiring tax breaks — including lower rates for all taxpayers adopted during the George W. Bush administration — and deep cuts to the Pentagon and other agency budgets.
Obama has threatened to veto legislation to avert the cliff that extends the Bush tax rates for the wealthy. After a campaign focused heavily on that pledge, Democrats say the president is prepared to draw a firm line in the sand, even if it means letting one of the largest tax hikes in U.S. history take effect on Jan. 1.
“Republicans face a choice, and the choice is theirs,” said Rep. Chris Van Hollen (Md.), the senior Democrat on the House Budget Committee. “If they want to drive off the fiscal cliff, that means they want to go into January demanding that people like Mitt Romney get a bonus tax break or nobody gets any tax relief.”
Despite the risks to the economy — and the potential disruption to the 2012 tax filing season — Democrats see a clear advantage to going over the cliff. In January, once the Bush tax cuts have expired, Democrats would be free to draft their own plan to cut taxes for the middle class, but not the wealthy, and dare Republicans to reject it.
“If you allow all the tax rates to revert, you’re talking about raising $5 trillion over 10 years,” Van Hollen said. “So Republicans will have to choose: Do they prefer $5 trillion in [new] revenue? Or something in the range of $2 trillion?” The latter revenue figure is the target amount set by the independent fiscal commission led by Democrat Erskine Bowles and former GOP senator Alan K. Simpson of Wyoming.
Obama’s most recent budget request called for more than $1.5 trillion in new revenue over the next decade, primarily by raising rates and limiting the value of deductions on annual income over $250,000. In the coming days, Democrats say, Obama is likely to launch a concerted public relations campaign in support of his budget plan, continuing his call for a “balanced approach” to debt reduction.