Reality check on the fiscal cliff: Let’s go ahead and jump off

To hear the pundits tell it, the nation is roaring toward a fiscal cliff on January1, and likely to run right off the edge of the cliff like the Wile E. Coyote, plunging back into recession. Luckily for all of us, that pundit picture is just as much a cartoon as the original Road Runner.

Here’s the story, in three easy moves:

First, what is the fiscal cliff?

Second, what happens if we “go over the cliff” on January 1?

Third, whose interests are served by insisting on a compromise solution right now?

What is the fiscal cliff?

On January 1, several things are scheduled to happen.

First, the Bush-era tax cuts will expire. That means higher taxes for everyone.

Second, the current payroll tax cuts will expire. This is a two-percent temporary tax cut made last year on the payroll taxes that fund Social Security. These taxes are paid only on the first $110,000 of income. That means higher taxes for wage earners. Will Congress renew this specific payroll tax cut?

Third, the alternative minimum tax will increase taxes on middle-income earners. This is a tax that was originally put in place to make sure people with high incomes paid their fair share, but it was not adjusted for inflation. Instead of fixing the formula to adjust for inflation, Congress passes a temporary fix every year. Will they pass one again this year? very likely.

Fourth, there’s sequestration. A succinct description from NPR:

“The biggest chunk of spending cuts come from what wonks call the ‘sequester,’ and what everybody else calls ‘those random cuts that got scheduled when Congress voted at the last minute to raise the debt ceiling and set up a supercommittee to cut spending, but the supercommittee couldn’t figure out how to cut spending, so now a bunch of automatic cuts are supposed to kick in.’ There’s a good chance that Congress will intervene to block some or all of these cuts.”

Fifth, unemployment benefits now run for up to one year, depending on a number of complicated factors. That ends January 1, and the total time that anyone can receive unemployment benefits drops back to 26 weeks.

What happens if we go over the cliff?

Going over the cliff means that Congress fails to act before January 1 to reverse the sequestration or to extend tax cuts and unemployment compensation. Dean Baker, of the Center for Economic Policy Research, describes the fearmongers’ line:

“Washington elites have spent much of the last three decades getting hysterical about budget deficits; however they are outdoing themselves in the current budget standoff which they labeled as ‘the fiscal cliff.’ Their story is that scheduled increases in taxes at the end of 2012, coupled with mandated cuts in spending, will send the economy tumbling into recession if Congress doesn’t take action before the end of the year.”

That line is reinforced by a Congressional Budget Office report saying that the country could fall back into a recession if Congress does not act to reverse the automatic budget cuts and tax increases.

That’s entirely possible — but it is not going to happen if we “go over the cliff” on January 1. Back to Dean Baker:

“However, the part is generally downplayed in this genuine horror story, or left out altogether, is that the projection of a recession is not based on missing the January 1 deadline. The projection assumes that the higher tax rates and lower spending levels are left in place throughout the year, a scenario that almost no one considers plausible.”

January 1 is not a magic date. The changes could be reversed on January 2 or 7 or 23 or February 12 — there is no magic date. As Paul Krugman writes in the New York Times:

“It’s worth pointing out that the fiscal cliff isn’t really a cliff. It’s not like the debt-ceiling confrontation, where terrible things might well have happened right away if the deadline had been missed. This time, nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013. So there’s time to bargain.”

Whose interests are served by insisting on a compromise solution right now?

Republicans in Congress want to preserve the tax cuts for the rich. They threaten to block any deal that lets the tax cuts for the super-wealthy expire on January 1. Once the tax cuts have expired, the playing field advantage changes dramatically. As Mark Weisbrot describes it:

Before the automatic tax increases (and spending cuts) kick in with the new year, the Republicans can say that President Obama wants to raise taxes.  In January, however, President Obama can say, ‘I want to lower taxes for 98 percent of Americans, and the Republicans are holding your tax cut hostage to win more money for the richest 2 percent.’  This change of political terrain would also free up hundreds of House Republicans who have signed the Grover Norquist pledge to not raise taxes, to make a deal.

So it’s in the interest of Congressional Republicans to insist that the fiscal cliff must be fixed now, right now, no waiting, before the tax cuts expire.

In fact, waiting until after January 1 might be the only way to raise taxes on the wealthy — just let the Bush-era tax cuts expire for everyone, and then pass new tax cuts for the 98 percent.

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