As the nation’s lawmakers get back to work after the holidays on negotiations to avoid the “fiscal cliff,” the White House released a report today that signals President Obama’s intent to keep pressure on Republicans by warning of the catastrophic consequences if Republicans allow the tax bill for the middle class to rise $2,200 by not freezing middle class tax cuts.
As the discussions between White House and Congressional staffers inch along, President Obama called House Speaker John Boehner and Senate Majority Leader Harry Reid over the weekend to discuss the fiscal cliff. Obama is expected to travel around the country, galvanizing public support for his plan to raise taxes just on the top 2 percent of wage earners—those making over $200,000 a year. He is also planning on meeting with a second group of prominent CEOs to talk about deficit reduction.
The potential tsunami that could take $2,000-3,000 out of the pockets of the average American is a confluence of the expiration of the Bush tax cuts, the expiration of President Obama‘s 2 percent payroll tax cut, and a huge cut in government spending, all set to go into effect at the end of the year and which would take a combined $800 billion or so out of the U.S. economy at a time when the nation is just recovering from the Great Recession.
Ironically, the enormous cut in government spending—including a $55 billion reduction to the Pentagon’s budget in 2013, a reduction of payments to physicians participating in Medicare, substantial cuts to FEMA and the Dept. of Education—was put in place by the White House and Congress during the 2011 debt-ceiling fight as a measure to force the two sides to compromise in order to stop the cuts from taking place. In other words, the two sides agreed to massive cuts that it never intended to let happen as a way of motivating itself two years later.
In its report, entitled “The Middle-Class Tax Cuts’ Impact on Consumer Spending & Retailers,” prepared by the National Economic Council and the Council of Economic Advisers, the White House argues that if Congress allows the middle-class tax cuts to expire, the economy would be devastated—the growth of the GDP could be slowed by 1.4 percentage points and consumers could spend an estimated $200 billion less than they would have in 2013 just because of the higher taxes.
“The President has called on Congress to act now on extending all income tax cuts for 98 percent of American families and not to hold the middle-class and our economy hostage over a disagreement on tax cuts for households with incomes over $250,000 per year,” the report states. “The Senate has passed this bill and the President is ready to sign it.”
A veteran Democratic aide told the Wall Street Journal that he didn’t expect any real progress on the fiscal cliff negotiations until the last minute, which he said was “two weeks away.”
While Republicans are trying to get Democrats to agree to larger cuts in entitlements, Democrats are trying to hold the line on entitlement cuts while getting Republicans to agree on tax hikes for the wealthy—something Republicans have adamantly opposed.
Though most analysts paint a picture of economic devastation if lawmakers aren’t able to avoid the fiscal cliff, some experts say that it wouldn’t be so bad if Washington waits until the new year to do a deal because once the tax hikes and entitlement cuts have happened, both sides will have more flexibility in coming to an agreement that will be even more helpful to the economy and deficit reduction in the long-term.
Allowing the nation to go over the fiscal cliff for a very short period of time will provide all the legitimate political benefits of such a policy dive—with few to none of the menacing losses that are looming at the bottom,” George Washington University professor Amitai Etzioni wrote on the Huffington Post. “We can readily fly off the cliff on January 1st and be back on the top by January 2nd, 2013—even earlier, if you cannot wait that long.”
