Hopefully you know about what DC insiders are calling the fiscal cliff. It’s kind of boring and labor-intensive to write about, so I haven’t been writing about it too much. Essentially, we have two things that will happen on New Year’s Day if Congress doesn’t do something to prevent them from happening. The first thing that will happen is that Bush’s tax cuts will expire, which means that everyone who pays income taxes will see an increase in their tax liability. The second thing that will happen is that the “sequester” will kick in. The sequester is a series of huge across-the-board budget cuts that include a $55 billion/year cut for the Pentagon.
Now, progressives have been calling for higher marginal income tax rates and cuts to defense spending for a long time. We might not be overly concerned at the prospect of seeing those wishes fulfilled on January 1st. But the sequester doesn’t just cut defense spending. It cuts all spending…by a lot. With the exception of Social Security, and with some protections for Medicaid and Medicare recipients, the budget cuts would hit every program there is. Also, across-the-board tax increases coupled with huge cuts in government spending would create a jolt in the economy, likely slowing economic growth or even sending us into recession.
The White House and Democratic leaders in Congress have decided that they are willing to take that risk. Understanding why requires a little bit of explanation.
At it’s most basic, this is Grover Norquist’s fault. Congress hasn’t raised marginal income taxes in twenty-one years, since Poppy Bush broke his “Read My Lips, No New Taxes” pledge. At the rate we’re going, we will never raise marginal tax rates again. Normally, raising taxes requires an affirmative act. Congress has to do something. They have vote for tax hikes. But that is not true with the Bush tax cuts. Because Bush didn’t have enough votes to overcome a filibuster against his tax cuts, he passed them using the budget reconciliation rules (with Dick Cheney casting the tie-breaking vote each time). The price of using the budget reconciliation rules is that the tax cuts automatically expire (or sunset) after ten years. Bush’s 2001 tax cuts expired in 2011, but they were extended for two years as part of a deal that extended unemployment benefits, ended Don’t Ask, Don’t Tell, and allowed the passage of the New START Treaty. The Democrats are willing to let the entire Bush tax cut package expire for two reasons. First, they’ll never be able to reverse the inexorably downward pressure on tax rates for the rich if they rely on actually getting Congress to act. Letting them expire reverses the leverage, requiring an affirmative act to lower the rates. Second, they don’t have to vote for a tax hike. They let them expire due to Republican intransigence, and then they all get to vote for tax cuts for the middle class.
The only downside is doing things this way causes real economic pain and confusion. Companies that have contracts with the government do not know if those contracts will be renewed and may stop hiring or start preemptive layoffs. People will have to assume that their taxes are going up and make plans accordingly, which will reduce consumer spending. The cuts in government spending will be done with a hacksaw instead of modern surgical equipment, and the Defense cuts are bigger and more sudden than the Defense Secretary can endorse. So, going over the fiscal cliff is certainly not a desirable thing. But it has become necessary because the Republicans are simply implacable in their refusal to make any kind of deal that is fair to the middle class and the poor.
Some of the damage of going over the fiscal cliff can be mitigated. For example, the president and the Democrats can make it very clear that their top priority in the new year will be to restore the current tax rate to anyone making less than a quarter of a million dollars a year. And they can promise to fix the defense budget, too. These are also things that they should have no problem accomplishing, especially if Obama is reelected.
The Republicans know that they can make political hay about the fiscal cliff all they want, but they have no real leverage. Some Republicans, like Sen. Tom Coburn of Oklahoma, are starting to attack Grover Norquist because the anti-tax pledge they’ve made to Norquist is preventing the GOP from coalescing around a deal that would result in a less negative outcome (from a greedy rich person or defense contractor’s point of view).
The Democrats have a few different motivations here. They don’t really want to go over the fiscal cliff but they are willing to do so for the reasons I have explained. They also feel that their credible threat will break the unity among Republicans which will not only lead to a deal, but will finally break Norquist’s iron grip on the party, leading to more sanity later on. Breaking that grip might be the greatest victory we could have.
