The idea has plenty of skeptics, and the White House regards it frostily. But it illustrates the wide range of early negotiating positions being staked out by Republicans and Democrats as lawmakers gathered Tuesday for their first post-election talks on how to avoid the looming package of steep tax hikes and program cuts.
Just as brazen, in the eyes of many Democrats, is the GOP leaders’ continued insistence on protecting tax cuts for the rich. President Barack Obama just won re-election, campaigning on a vow to end those breaks.
Democrats and Republicans appear heading toward another round of brinkmanship that will test who blinks first on questions of major importance. It’s a dance that has infuriated many Americans, shaken financial markets and drawn ridicule from foreign commentators.
In late 2010, after big GOP midterm election wins, Obama backed off his pledge to raise taxes on the rich. In the summer of 2011, House Republicans pushed Congress within a hair of refusing to raise the debt ceiling, leading to the first-ever downgrade of the government’s credit rating. And last December, it was the Republicans’ turn to blink, yielding to Obama’s demand to extend a payroll tax break.
The “fiscal cliff” deadline comes in seven weeks. One provision: Unless Congress acts, all Bush-era tax cuts would expire, raising 2013 tax bills for most Americans. Obama wants to end those tax cuts only for households making more than $250,000 a year. Republicans insist on no tax rate increases anywhere.
If the “fiscal cliff” takes effect, congressional Republicans would feel pressure to give ground in several areas to achieve their top goal: restoring tax cuts for as many people as possible. That’s why Sen. Patty Murray, D-Wash., and other Democrats have said their party’s leaders should seriously consider letting the Jan. 1 deadline pass and then negotiate with Republicans under sharply different circumstances. Some or most of any new agreements could be made retroactive to Jan. 1, they say.
If Republicans refuse to let tax cuts expire for the wealthy, Murray told ABC’s “This Week,” “we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year. And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this.”
Murray’s allies say voters would blame Republicans for refusing to yield, especially on tax rates, given that Obama won re-election. A recent Pew Research poll supports that view. More than half of the respondents said they would chiefly blame congressional Republicans if there’s no compromise on the fiscal cliff; 29 percent would blame Obama.
It’s questionable whether Obama and Congress’ Democratic leaders would let the government go over the fiscal cliff. Numerous financial analysts say the event would frighten markets, alarm employers and probably trigger a new recession.
However, there’s a school of thought that the cliff is actually a slope, and the economy could withstand the effects of the automatic spending cuts and the renewal of Clinton-era tax rates for at least a few weeks to give time for negotiations to continue. Liberals note that tax rate increases would be felt gradually.
“In the first paycheck of the year, people will see that their withholding is up, but it’s not the like the whole amount of their tax bill for the course of the year takes place in their first paycheck. It happens gradually,” said Chad Stone, an economist with the liberal Center on Budget and Policy Priorities.
The second part of the cliff package includes across-the-board spending cuts of $109 billion a year, split equally between military and domestic programs and known in Washington-speak as a sequester.
Some budget experts say the spending cuts would phase in gradually. Also, Social Security, Medicare and food stamps are exempt. And agency fiscal chiefs have flexibility to mitigate the effects of the sequester.
But such tools are limited. They might buy only a little time before the spending cuts begin to bite harshly, requiring agencies to furlough employees and causing delays in awarding government contracts.
Many say even talk of going over the cliff is sheer folly.
“You’re going to have big financial market repercussions to this,” warned economist Douglas Holtz-Eakin, a former director of the Congressional Budget Office. “Those sorts of confidence measures you don’t control — and they happen abruptly.”
House Minority Leader Nancy Pelosi (D-Calif.), showed no interest in challenging the fiscal cliff. “I want you to be disabused of any notion that there is any widespread thought that it would be a good thing, for our country, for us to go over the cliff,” she told reporters Tuesday.