The talk about the fiscal cliff has confused many, and I would like to bring some clarification to this issue to my peers.
The Basics: the reason for the “fiscal cliff” talk is that on January 1st, Bush tax cuts (2001, 2003) will expire and revert back to Clinton-era rates on a wide ranging of taxes i.e. personal income tax, dividends tax, capital gains tax, estate tax. in addition to literally thousands of middle class Americans getting hit with something called the Alternative Minimum Tax, which was originally designed to capture the rich who don’t pay their fair share. In addition, about $100 billion of domestic spending, including defense, will be cut as a provision of the Budget Control Act of 2011. The totality of this “cliff” amounts to a fiscal impact of $500-600 billion on the economy, which economists of all stripes predict nothing short of another recession in 2013 if this so happens.
What does this mean to President Obama? President Obama’s re-election was threatened by the poor economic performance of his first term. Even though this time around, he doesn’t need to worry about re-election, presidents in their second term often crave for a credible legacy. With that said, it is in President Obama’s best interest to ensure that economic recovery remains strong. Looking at it from this vantage point, the threat of another recession is undesirable for the President, who has other priorities – domestic and foreign – for his second term i.e. immigration reform, education, energy, Iran, Middle East overall, China. He doesn’t want to spare his political capital dealing with an ailing economy for much of his remaining tenure. Plus, the botched debt ceiling talk from last year tarnished his image as a negotiator-in-chief. His political reputation is also on the line. Since the White House knows its limited ability to force the hands of progressive liberals in Congress, it is willing to compromise with Boehner beyond the baseline laid out by Reid-Pelosi (which is why Obama moved the goal post to $400,000)
What does this mean to Democrats? With a recalcitrant Tea Party wing within the Republican ranks, especially the Republican-controlled House, there seldom will be opportunities for more tax hikes than this in the years to come. The President’s re-election provided us with cover. We can claim mandate on taxing the rich. This is a golden opportunity not to be missed. Since revenue bills have to originate from the House, so the Republicans really control the purse string at least in the near future (save anything dramatic there’s fat chance that Democrats will re-capture the House in 2014). “Saving” Medicare and Social Security are huge priorities for us. We certainly don’t want to be painted as balancing the nation’s finances on the backs of minorities and the poor (wink wink our most loyal supporters) – let’s save that honor for the GOP, who already built a brand as the “Party of No,” let’s dump all that on them and force their “extremism” out on entitlements – I mean human rights to basic dignity in this world.
What does this mean to Republicans? The polls show that the public trusts the President more on the fiscal cliff issue, especially when the President’s approval rating is at all all-time high. However, is a deal possible with the fiscal hawks who want more spending cuts? Also considering that most of them ran on a no-tax-increase platform back home? I know at the core of our conviction that we spend too much in this country. We are marching towards a deeper welfare state. If Republicans run the White House, we’d have entitlement reforms come spring but… The reality is that we have stuck our neck out for a deal – we proposed tax increases on those making more than $1 million and the President still said “no.” The President wants to play hardball because we forced his hands two years ago. He now has the leverage, and we have the short end of things. So help us God.
What does it mean to average, non-Washington folks like you and I?
One camp would argue that going off the cliff is not so bad. The middle class will pay more taxes, and they will be more conscious of how much the country’s really spending. In the long run, what’s not to love? The other camp would say that going off the cliff will disproportionately affect middle class – higher taxes AND cuts to certain public benefits. Either way, it’s bad news for regular people. Congressional Budget Office projected that unemployment will tick up to 9% nothing gets done to avert the fiscal cliff.
In retrospect, if Boehner and Reps postured the former position (jump the cliff) and maintained a consistent no-tax-increase position, then Republicans may have had greater leverage throughout the talk. However, Boehner blinked first. Now the President and Dems have successfully gained the leverage point, especially after Boehner pulled off the vote on his own proposed plan due to lack of support. Just to be clear, both Reps and Dems wanted to extend middle class tax cuts. Why? In American politics, raising taxes on middle class will be the ticket for your Party to be in the minority, assuming you survive your next election. Another recession means higher unemployment, potentially setting back our economy for a few more years, and leading to more government benefits for the unemployed (as long as Democrats have power in Washington). Sadly though, our nation’s finances really won’t be that much better. We are fast approaching $17 trillion in debt, and we will still have hundreds of billions of deficit annually for the remaining years in the decade, even after passing President Obama’s tax raise on those making more than $250,000. Nothing save major tax and entitlement reforms will put our country’s fiscal house in order. The President said that he’d work on tax reform in 2013. We will see. Right now, Boehner had tossed back the political football to Reid and Obama as result of his failure to whip enough votes for “Plan B,” and in the Speaker’s own words, what comes next, “God Only Knows.”