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Is the So-Called "Fiscal Cliff" Reality or Fear Tactic?

Updated on December 10, 2012

Any person in his or her right mind and speeding toward a cliff would certainly slam on the brakes to avoid going over—and rightly so, because of the likelihood of death and destruction.

For the better part of a year, we have been listening to pundits and politicians declaring that the country is headed toward a so-called “fiscal cliff” and if it is not averted, it will lead to an economic catastrophe. On radio and television and in the print media, the warning has been sounded so often and so loudly that the term “fiscal cliff” has etched its way into the national consciousness to such a degree that almost all of us are talking about it. Although many of us don’t know exactly what it is, we do know that the image suggested by the term is scary and that it should be averted.

The term has reference to the massive mix of tax increases and spending cuts that are set to start on January 1. Thomas Kenny in an article posted on About.com says it best. “’Fiscal cliff’ is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.” He goes on to explain: “Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for business, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect.” Most economists agree that the effects of these cuts and spending will be dramatic. They will reduce the deficit by an estimated $560 billion, but according to CBO it will result in the loss of about two million jobs in 2013 and will lead to another recession. That’s why it is called the “fiscal cliff.”

Does this term really describe the results of going beyond December 31 without a resolution to the problem? Politicians and pundits are beginning to voice their doubt that going beyond that date is like going over a cliff. They admit that going over the cliff can be devastating, but it does not have to be so. Thomas Kenny explained: “It’s important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes—while destructive over a full year—will be gradual at first… Congress can act to change the laws retroactively after the deadline. As a result, the fiscal cliff won’t necessarily be an impediment to growth even if Congress doesn’t address the issue until after 2013 has already begun.” What Kenny and others are saying is that the impact of going beyond December 31 will not have the same impact as driving over a cliff, because the tax increases and spending cuts will kick in gradually—not suddenly.

The one point that led to the so-called “fiscal cliff” is the same point that hinders the White House and the House of Representatives from making a deal to resolve the problem—the Bush tax cuts. In 2011, Republicans would not agree to any deal to raise the debt ceiling without extending the Bush tax cuts, and President Obama would not agree without letting the tax cut expire. Obama caved and a deal was cut, which left a lot of unfinished business—automatic spending cuts and tax increases would go into effect on January 1 if a “super committee” could not reach a deal. The committee failed, and the first order of business for Congress and the President after the election is to finish the task.

President Obama and Speaker Boehner immediately drew their lines in the sand. Obama declared that he would not deal unless tax rates on individuals earning $200 thousand per year and couples earning $250 thousand are raised to the same rate as it was before the so-called “temporary” Bush tax cuts, and Boehner announced that no deal would be made without extending the tax cuts.

Instead of raising the tax rates, Boehner offered to raise revenue by closing loopholes and deductions in the tax code, the same plan that Romney campaigned on and lost the election. President Obama campaigned on raising the rates and won the election. And yet for some strange reason, Boehner offers the same old plan. I wonder if he knew that Romney’s plan was rejected by the voters, or if he and the GOP are just headstrong. He said on national television that the president wanted the Congress “to roll over,” but it seems that he wants the president to roll over on something that he won on. Boehner’s logic is hard to see.

Standing firm on the promise he made on the campaign trail, Obama seems to be willing to go over the so-called “cliff.”

Under pressure by many of his party and perhaps being aware of the polls that agree with Obama, Boehner seems to have signaled over the weekend that he is ready to give up his fight for extending the Bush tax cuts. The problem for Obama, however, is what he will demand for a deal. If he wants too much, it may be far better to go over the cliff.

President Obama may have figured out that the fiscal cliff is not the “boggy man” (to use another metaphor) that it has been chalked up to be. If the spending cuts and the tax increases are allowed to go into effect on January 1, one thing is certain; no longer will the GOP have to argue about the Bush tax cuts. Besides that, with the deep cuts in defense spending and the higher taxes on small business, the House Republicans may be ready to comprise. If not, the fiscal cliff, over the full year, will become reality—and devastating.


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