The world did not end when we reached 12/21/12 on the Mayan calendar — and it won’t end when we go over the fiscal cliff at the stroke of midnight. Quite the opposite, the chances for a good tax and debt reduction deal will improve significantly in the New Year.
To see why a good deal is unlikely today, consider: Democrats and Republicans are supposed to be negotiating a deficit reduction deal. Yet according to Sen. Rob Portman (R-Ohio), Senate Democrats actually demanded $600 billion in new spending yesterday — more new spending than new tax revenue.
Think about that. Instead of negotiating how best to reduce the deficit — the right mix of tax increases and spending cuts — Democrats wanted to wanted to spend all the tax increases. We should be negotiating over how we are going to reduce the deficit — not whether to reduce the deficit. As Portman tweeted this morning, “Wld b crazy to avoid #fiscalcliff w MORE spending & NO deficit reduction.”
If Democrats are so delusional that 24 hours before we reach the fiscal cliff they are asking Republicans to increase the deficit with $600 billion in new spending, there is little chance they will offer an acceptable compromise before midnight. But the chances for a deal favorable to the GOP will improve dramatically after Jan. 1. Here are three reasons why that is the case:
First, it will be easier to cut a deal when taxes go back to the Clinton rates at midnight — because the baseline for negotiations will be reset. Everything either side proposes will be a tax cut and no one is being asked to violate his or her principles. Under the Clinton rates, it is far easier to see a scenario in which we achieve fundamental tax reform — and both sides can claim victory.
Second, when taxes go up on everyone, there will be increased pressure on all sides for across-the-board tax cuts. At midnight, tax rates will go up for every tax bracket, and an estimated 33 million taxpayers — mostly from Democratic-leaning blue states — will be required to pay the alternative minimum tax for the first time, up from 4 million who owed it in 2011. This will spark a good old fashioned tax revolt. Instead of Republicans being under pressure to raise taxes, Obama and the Democrats would be under pressure to cut them — and Republicans will be able to outbid Democrats in any proposed tax cuts.
Third, while Democrats have all the leverage right now, tonight the leverage shifts to the GOP. At midnight, we not only go over the fiscal cliff, we also reach the debt limit — and when the debt limit comes into play, Republicans regain the upper hand in negotiations with President Obama. That’s because, while Obama can afford to go over the fiscal cliff, he can’t default on our nation’s debt. Obama has no choice but to compromise with Republicans in the new year.
Moreover, going off the fiscal cliff buys more time to cut a deal. Once we reach the debt limit tonight, Treasury Secretary Tim Geithner will use “extraordinary measures” to avoid default for several months. Thanks to the tax increases and spending cuts that go into effect at midnight, going over the cliff would, according to Geithner, “have the effect of adding some additional time to the duration of the extraordinary measures.”
For all these reasons, Republicans will be able to negotiate a much better deal the next few months than anything they could negotiate in the next few hours. When the ball drops in Times Square tonight, 2012 will disappear into history — and so will President Obama’s leverage over the GOP. Come January, Republicans can use their post-cliff leverage to reform the tax code, reform entitlements and reduce the debt. They will hold all the cards ... so long as they don’t cave between now and midnight.