While many Americans may worry about seeing their income drop if the nation goes over the “fiscal cliff,” Chris Adams has a different problem. An agreement that raises taxes on the wealthy and spares the middle class could still mean that he loses all his income next year.
Laid off in May from an operations job, the resident of Avon Lake, Ohio, has been relying on federal unemployment benefits that expire at the end of month. President Obama wants to extend them, but top GOP congressional aides say the president has little hope of doing that if he continues to play hardball and insist that tax rates on the wealthy rise.
“It’s a lot of added stress,” Adams said.
The uncertainty facing Adams and millions of others receiving unemployment insurance underscores the difficult trade-offs involved in the debate over the fiscal cliff. With tax hikes scheduled to happen automatically at the end of the year and polls showing Obama with a clear advantage on the issue, the president seems to have much of the leverage. But a complicating factor is the fragile economy, which appears to be slowing down. The 7.9 percent unemployment rate is expected to remain unchanged when November’s jobs numbers are reported Friday and is unlikely to come down much through the start of next year.
Obama appears to be making progress in the legislative debate on the central issues of renewing George W. Bush-era tax cuts for the middle class and increasing tax rates on the wealthy. But victories over the GOP on those issues, some congressional aides and economists say, would probably come at the expense of other priorities, such as a payroll tax cut or infrastructure spending, that Obama says are important in a weak economy.
“Democrats have to think about what matters more — getting people employed sooner or immediately raising rates,” said Joseph Gagnon, an economist at the Peterson Institute for International Economics and an Obama supporter. “Are they willing to have hundreds of thousands more people linger in unemployment just out of a desire to punish the rich?”
Gagnon said it is important for there to be a long-term plan to reduce deficits — and that slowly raising taxes on the wealthy is an important part of the plan — but he said the weak economy means that it should not take effect for at least another year.
According to economists, if the payroll tax cut is not extended at the end of the month, it will mean at least $1,000 less in take-home pay for the average family. If unemployment benefits are not extended, 2 million people could lose their income. And wealthy people would pay far more in taxes.
“You end up tightening for everybody. You end up tightening for the middle class, for the unemployed, and you end up tightening for the top,” said Nigel Gault, an economist with IHS Global Insight. “Ideally, I would say don’t do any tightening in 2013.”
Democrats and some economists say there is a false choice between raising rates on the wealthy and extending measures to help reduce unemployment. They note that independent analyses show that raising upper-income taxes has relatively little effect on the economy while contributing a good deal to long-term deficit reduction.
“The best policy is clearly to enact some sort of stimulus today and also make a long-term and credible commitment to deficit reduction over the long haul,” said Adam Looney, senior fellow at the Brookings Institution and a former economist in the Obama White House. “If you look at the short-term stimulus, the high-end tax cuts don’t have much of an effect on the near-term economy, but they have a lot to do with deficit reduction.”
Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former Obama administration economic adviser, argues that this opportunity to stabilize the nation’s long-term borrowing is too important to pass up, even if it puts a bit of a drag on economic growth in the short term.
“If all you cared about was very near-term growth, then kicking the can and adding some stimulus might sound good to you,” he said. “But we actually have an opportunity to improve our fiscal outlook without hurting the near-term economy, and we shouldn’t let it slip by.”
Another potential risk of a deal that involves only raising taxes on the wealthy and freezing tax rates for the middle class is that it might not include raising the debt limit. Republicans say they will agree to a plan to raise the debt limit only as part of a broad agreement on deficit reduction — not simply as part of a deal to extend the middle-class tax cuts.
Obama, addressing business leaders Wednesday, warned against this approach, reminding them of what happened when Republicans demanded deep spending cuts in exchange for raising the debt ceiling in the summer of 2011.
“Most of you were involved in discussions and watched the catastrophe that happened in August of 2011,” Obama told the business leaders. “There’s no uncertainty like the prospect that the United States of America, the largest economy that holds the world’s reserve currency, potentially defaults on its debts, that we give up the basic notion that the United States stands behind its obligations. We can’t afford to go there again. And this isn’t just my opinion. It’s the opinion of most of the folks in this room.”
Michelle Girard, an economist at RBS, said a deal that avoids the fiscal cliff but does not resolve the debt limit will have limited benefit.
“Any agreement that would get us over the fiscal cliff has to include a debt-limit increase. Otherwise, we’re going to be right back with a similar type of situation in another two months,” she said. “In that sense, the market will continue to be skeptical of promises of future agreements. It doesn’t really remove any uncertainty in the near term.”