Friday, November 16, 2012

Over the Cliff

The "Fiscal Cliff" is approaching. President Obama has made it clear that he will not accept a deal that does not raise the marginal rate on the highest earners. The Republicans have similarly made it clear that they are willing to eliminate tax adjustments and loopholes so that revenue is higher but they will not accept higher rates and actually would prefer the rates flattened.

Prior to the election I characterized it as a choice between competence and ideology. That is how this fight is breaking down. There is evidence to indicate that the Republican proposal would help the economy and the President's would hurt it. That does not matter to the President. He is fixated on having the rich pay a nominally higher percentage, even if they would pay as much or more under the Republican proposal.

The worst thing is that there are people on both sides rooting for the government to fall over the Fiscal Cliff.

The Fiscal Cliff was created a year and a half ago as part of the debt limit negotiations. Rather than continue to give the President unlimited spending power, the Republicans insisted that an immediate raise in the debt limit must be tied to long-term deficit reductions. With the deadline approaching fast, there was no time to hash out a complicated plan so they promised to do it later and they established the Fiscal Cliff as an incentive to force the issue. The idea is that if no cuts could be decided on then everything would be cut with a disproportionate amount of the cuts coming from defense. This will throw tens of thousands of government workers and contractors out of work. In addition to that, all of the tax cuts will expire. This combination could easily force a new recession.

A few fringe Republicans want to see the cuts go through. They see this as the only way to actually slow government growth.

On the other hand, several senior Democrats see the Fiscal Cliff as a way of gaining political advantage. If it happens they figure that the Republicans will be so desperate that they will accept any deal the Democrats offer. They also see it as a loophole in the Republicans' pledge not to raise taxes. They figure that once the rates rise automatically, the Republicans will only have to vote on reducing taxes for most people instead of raising them on a specific group.

There is a good chance that the Democrats will win this. In the debt negotiations, the last sticking point was when the debt limit would come up again. The President insisted that the debt limit be raised high enough to last past the election and was willing to collapse the  world's economy rather than give on this issue. I expect to see him play the same trump card again and for the Republicans to take the responsible course and give in.

But, there is a second Fiscal Cliff coming up. The debt limit will need to be raised again soon.

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