Cliff Update: Better to Go Over than Accept a Bad Deal

December 30th, 2012 at 1:25 pm

The fiscal deadline otherwise known as the fiscal cliff has been in place for a very long time.  The Bush tax cuts were extended for two years back in 2010.  The “supercommittee” failed to come up with a budget agreement over a year ago.  And yet here we are, with Congress cramming into the night to try to kludge something together by this afternoon so it can go the House tomorrow, hours before the deadline.

According to the WaPo:

If all goes according to plan, the [Senate] leaders would roll out the legislation Sunday night and hold a vote by at least midday Monday, giving the House the rest of New Year’s Eve to consider the measure.

“According to plan??”  That’s the plan?!?

This isn’t just scarily dysfunctional government…it’s freakin’ embarrassing.

If Senators McConnell and Reid hammer out a budget deal that can pass their caucuses, Rep Boehner is likely to take it up in the House.  If it passes there—and since it will include a tax increase, it will take D votes to get to 218—the President will presumably sign it before the ball drops in Times Square.

I can’t imagine anyone will call that a success, but we will have avoided going over the fiscal cliff.  But at what cost?

Much of that cost will be significantly reduced revenues in the deal.  The Senate leaders are reported to be squabbling over the income tax threshold and the estate tax.  If McConnell can get Reid to agree on a higher income tax threshold–$400,000 (as opposed to $250,000) is back in the mix—and more generous estate tax parameters, will such a deal get through D’s in both Houses and the White House?

I don’t know and I hope not but it could.  Members and the White House may be so motivated to close a deal at this point that they’ll take a lousy one.   The Post reports that letting tax rates “lapse on income over $400,000 would raise about $600 billion over the next decade, according to White House estimates — barely a third of the $1.6 trillion Obama initially hoped to extract from high-income households to help reduce record budget deficits.”  If the deal locks in the current estate tax parameters instead of the more progressive ones the White House wants, that loses another $100 billion.

On the other hand, the deal would income extended unemployment benefits, and going over means a “hard cut off” for millions of recipients—they’ll lose benefits on Jan 1.  And these are the long-term unemployed, so they’re already struggling.  We could fix this retroactively, but they’d still get hurt.

Even so, it would be better to go over and quickly repair the damage on the other side.  How do I know we’d get a better deal there?  I don’t, but at that point, I suspect Congress would quickly implement the President’s back-up, bare minimum plan: cut the now-higher taxes on households below $250,000 (which after Dec 31 scores as a big tax cut, so R’s can enthusiastically get behind it), extend UI, patch the AMT and doc fix, and maybe suspend the sequester.  The estate tax will have reset to a much worse deal for those R’s and D’s who want to protect the top few tenths of a percent of wealthy estates ($1 million exemption, 55% rate), so they too would be motivated to accept the WH’s deal ($3.5 million exemption, 45% top rate, as opposed to what we might get from the Senate deal: $5 million, 35%).

Those who hate that deal can start sharpening their knives for the debt ceiling fight, but that’s another story…an even sadder one.

Months ago I and others argued that it would be better to go over than get jammed on a bad deal that squanders the leverage supporting a better, more progressive outcome.   Stay tuned…

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10 comments in reply to "Cliff Update: Better to Go Over than Accept a Bad Deal"

  1. foosion says:

    It’s so obvious that it’s much better to wait. Even the Rs freely admit their leverage essentially vanishes January 1. Why doesn’t Obama and our elected D representatives see this?

  2. David C says:

    Don’t forget we have another debt ceiling debacle waiting for us only a few weeks out. If Reid moves right of Obama’s small-bore proposal, you can be sure that the final outcome will move even further right as we deal with the debt ceiling.

    Frankly, my preferred outcome at this point is to go over the cliff and stay there permanently. It would be tough on people in the short term — certainly a recession — but it would give the government the funds it needs to meet its obligations. You could take up the payroll tax relief and extended UI benefits separately — let the Republicans vote against them if they dare.

    • Jared Bernstein says:

      Friendly amendment–go over, stay over, but offset 2013 fiscal contraction with large stimulus.

  3. expr says:

    Apropos of nothing, I had a hare-brained thought:
    Let’s really incentivize those “job-creators”.
    Make the tax on capital gains and dividends a strictly increasing
    function of the unemployment rate (or a strictly decreasing function
    of the employment to population ratio)
    e.g. 10*unemployment_rate – 25

  4. John Hobgood says:

    We need to get rid of the “Debt Ceiling” altogether. It just ends up in a political soap opera and perpetuates the myth that we need to “borrow” our fiat currency from the likes of China and that Federal taxes are needed for “revenue”. That’s why you bother using fiat in the first place. You don’t have to “borrow” it from anybody and you don’t have to obtain anything to spend it (unless you peg to some other currency).

  5. Kenneth D. Franks says:

    Fiscal cliff: Go over it and add stimulus, says Brookings’ William Gale. 7/31/2012 Washington Post, Politics by Allen McDuffee with video. There is a link to this story and video on my blog.

  6. The Raven says:

    We are so screwed.

    Oh, well. With luck the Republicans will refuse to take yes for an answer again.

  7. Alyosha says:

    If unaccountable lame ducks pass a backroom deal that has received no public scrutiny, there is also a cost to the democratic process. This phenomenon is not unique to the Obama years, but it has become such a hallmark of how he and the Rs roll that no one seems to notice anymore.

  8. Scary Lawyer Guy says:

    I agree, Mr. Bernstein. Better to go off the curb and negotiate a deal w/o artificial timelines involved than to accept a bad deal. My column: