Eleventh hour “fiscal cliff” talks are now scheduled for Thursday, Dec. 27, when President Barack Obama returns from his Hawaiian vacation. While there’s no deal yet, the mood remains cautiously optimistic on the Hill that, at the very least, Congress will punt, when it comes to raising taxes. Of all the casualties on the “fiscal cliff” fiasco, House Speaker John Boehner could not look more ineffectual. Unable to control the rabble on the political right, Boehner finds himself unable to corral enough votes for even modest tax increasse. Boehner at least hoped that House anti-tax conservatives would follow GOP Party Boss Grover Norquist in accepting tax hikes on incomes over $1 million a year. When Barack touches down at Andrews Air force Base tomorrow, he’ll be lucky to get the House to agree on tightening tax loopholes, let alone get any tax cuts on wealth taxpayers.
If Obama fails to get any concessions from the GOP, he should proceed with the next best thing: Leaving the Bush-era tax cuts in place. Given the sluggish U.S. economy, most economists worry that higher tax rates could plunge the economy into a double-dip recession. With retailers reporting lackluster December sales, preserving the Bush tax cuts becomes even more urgent. If the U.S. careens over the “fiscal cliff,” Wall Street could sell-off at a time when the Treasury needs to keep tax revenue steady. Unlike the House, the Senate is ready to pass legislation to kick the can down the road. House Republicans are still hell-bent on deficit reduction, forgetting that federal budget deficits as a share of the nation’s Gross Domestic Product have shrunk over the last two years. Obama has already lost the tax-the-wealthy argument, leaving him few fallback positions.
With neither side flinching, Obama and Boehner have come to the end of their game of chicken. No one wins politically if 98% of taxpayers get hit with a 5%-10% tax increases. Regardless of all the proposed spending cuts, U.S. budget deficits would go through the roof if the economy plunges into recession. Budget deficits have improved over the last two years because 5.5 million taxpayers have gone back to work. More layoff and higher unemployment that comes from another recession is the worst case scenario for federal budget deficits. “This is the ‘Break Glass’ scenario that we have long believed would rise in probability the closer we go to Dec. 31, which essentially calls for extending all the rates for those individuals making under $200 K and household under $250K and does not address the debt ceiling or deficit,” wrote New York-based Guggenheim Securities’ Chris Krueger.
Economists know that long-term economic recovery comes from expanding U.S. employment. Sending the country into a double-dip would delay economic recovery indefinitely and send Wall Street into a tailspin. Whatever the ideological difference between Republicans and Democrats, neither side wants to push the economy into a double dip. More scary than automatic tax hikes slated for Jan. 1 are $109 billion in programmed spending cuts, threatening to toss thousands of federal workers into unemployment. While logic and the polls are on Barack’s side, neither wants a new recession. With third quarter employment growing, the government must double-down on private sector and government jobs, not push more government workers into unemployment. Had former GOP Romney become president, he would have sacrificed federal workers.
Obama has been criticized for not working better on Capitol Hill. Given the anti-GOP’s Tax religious fervor, no president could have convinced the House to raise taxes. Norquist’s concession on incomes above $1 million went over like a lead balloon. His protégés in the House are more fanatical than their anti-Tax icon. While a recent Gallup poll indicated 50% of respondents believe a “fiscal cliff” deal is still possible by Dec. 31, it’s more likely that the battle will be carried over into the New Year. No matter how big his landslide Nov. 6, Barack found out the hard way that he’s chopped liver on Capitol Hill. Solving the “fiscal cliff” deal now gives way to a stopgap measure to preserve what’s left of the Bush tax cuts. Obama needs to stop pointing fingers at Boehner and find a way to keep the tax cuts in place. Expecting House Republicans to fall in line is unlikely and unrealistic.
Today’s Washington stalemate over the “fiscal cliff” stems from an angry GOP backlash against the Nov. 6 Election. Voters rejected former GOP nominee Mitt Romney’s formula for economic growth that included slashing the federal budget to reduce budget deficits. Unwilling to cut Barack any slack, the GOP House insists that only slashing government spending is the way out of today’s $1.1 trillion federal budget deficit. House members have been told by the Federal Reserve and most reputable economists that deficits continue to shrink relative to the nation’s 3.1% GDP growth. Economic stimulus and more employment is the long-term fix to reducing budget deficits. Tea Party members don’t care that with another one percent drop in unemployment, the deficit would drop to under $500 billion. An improving economy is the key to long-term growth.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.