As the 2012 election season winds down, politicians are beginning to remember that other part of their job — governing the nation. There are many difficult issues facing President Barack Obama and Congress, but none is as immediate as the so-called fiscal cliff.
The fiscal cliff is not quite the emergency it’s been painted to be, but it still requires action in the near-term. The Bush tax cuts and the payroll tax holiday are both set to expire at the end of the year. Also, major cuts to defense and Medicare spending are set to kick in at the same time.
Negotiations to avoid spending cuts and a complete end to the Bush tax cuts are likely to dominate the news over the next six weeks. As those negotiations begin, Democrats find themselves in an unusual position — with a great deal of leverage.
Most Tax Cuts Likely to Continue
President Obama agreed to a two-year extension of the Bush tax cuts in 2010 in order to win concessions on the payroll tax holiday and unemployment insurance, and to break a general filibuster in the Senate that was preventing action on repealing Don’t Ask, Don’t Tell.
While Obama had favored continuing tax cuts on income of less than $250,000, he was clear that he was unhappy with the extension of tax cuts for the wealthy. Obama campaigned for the presidency on a platform of ending those tax cuts, a position that most Americans support.
On tax cuts, Democrats have one important bit of leverage. In order to maneuver tax cuts through a divided Senate, President George W. Bush structured them to end after ten years. After the additional two-year extension, the cuts will end completely at the end of December, unless Congress acts.
Democrats have been clear that if Republicans do not agree to extend tax cuts only for incomes less than $250,000, they will allow the cuts to expire, and then author new legislation in 2013 cutting taxes on lower income back to the Bush tax cut level.
This puts Republicans in an awkward spot. If they don’t move to compromise with Democrats, they’ll be forced into a position where they vote against significant tax relief for all Americans because it doesn’t include bigger tax cuts for the wealthiest among us.
This has made Republicans circumspect in their post-election pronouncements. While Republicans have stopped short of saying they would agree to a tax increase on the rich, House Speaker John Boehner has signaled that he would be open to “increased revenues.” Indeed, Bill Kristol, editor of the conservative Weekly Standard, has said bluntly that Republicans will have to compromise.
“Really? The Republican Party is gonna fall on its sword to defend a bunch of millionaires, half of whom voted Democratic, and half of whom live in Hollywood and are hostile to Republicans?” Kristol said in an interview on Fox News.
Even if no action is taken before the end of December, Democrats can ensure that the tax cut battle does not immediately impact the economy. The Obama Administration can continue the current tax withholding schedule indefinitely, meaning that the effects of the increased taxes won’t show up in the economy right away. As long as Congress acts at some point before the end of 2013, the tax part of the fiscal cliff won’t be a doomsday scenario.
GOP Pushes for Higher Spending
The other part of the fiscal cliff is spending cuts, which were authorized by the very Republicans who now warn against them. The 2011 fight over extending the Debt Ceiling was resolved with a compromise. Democrats and Republicans would agree to draconian cuts in defense and entitlement spending, which was intended to force a “supercommittee” of Republicans and Democrats to forge a deficit-reduction plan.
The supercommittee ended up deadlocked, with Republicans refusing to consider any tax increases to balance the budget. This meant the “sequestration” cuts suddenly became law, effective in 2013.
Republicans have reacted with panic, as the most immediate impact would be to defense spending. The entitlement cuts were structured to reduce compensation to providers, but not impact health care for people receiving federal care.
This has an asymmetric impact. While Democrats don’t support the sequestration cuts in Medicare, they can live with them, and many Democrats in Congress are quite fine with cutting Defense. Republicans, meanwhile, are forced to abandon their claimed opposition to the deficit, and acknowledge that cutting government spending could adversely impact the economy.
For Democrats, then, this is another case where they hold the leverage. Republicans are desperate to avoid the cuts in defense spending that they voted for.
Republicans also lose their biggest hammer if the cuts do go into effect, even temporarily. Republicans have threatened to refuse to extend the debt ceiling again, which would force yet another crisis over government funding. If the tax cuts are not renewed and spending cuts go into effect, however, the debt ceiling vote will be pushed back.
A “Grand Bargain” in the Works?
Since the Republicans hold such a weak hand, there’s every indication that they will seek to work with the Obama Administration to pass a deficit-reduction plan that both parties can support. Republicans know that some tax increases are all-but-inevitable; the question becomes whether they can compromise with Democrats to limit those increases, and perhaps win concessions on spending.
Any bipartisan compromise is likely to disappoint partisans on both sides, but that doesn’t necessarily mean it’s a bad idea. There is no question that the deficit is large, and that it will need to be addressed at some point. The main question is whether we can balance the budget sensibly, without harming the economic recovery, and without doing so on the backs of the poor, sick and elderly.
While it’s entirely possible that Republicans will continue to be implacably opposed to President Obama, they are at a decided disadvantage going into these negotiations. If nothing is done, we will go over the fiscal cliff — but that is likely to harm Republicans politically far more than Democrats, something the GOP is well aware of.
Image Credit: Martin Abbeglen