Who’s Afraid of the Fiscal Cliff?

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Sarah Binder writes today that she doesn’t expect this year’s lame duck session of Congress to conclude a deal that will avert the “fiscal cliff” our legi-lemmings are set to march over on December 31. She has three reasons, and the first two boil down to the fact that Republicans aren’t likely to suddenly stop being crazy just because we had an election, even if Obama wins.1 I can buy that. But here’s reason #3:

Third, I’m somewhat skeptical that Democrats would have the political fortitude to go over the cliff. Democrats could have stuck to their guns in the lame duck of 2010, forcing Republicans (still in the minority) to swallow an increase in upper income tax rates as the price for extending the middle class tax cuts. That’s not the strategy Democrats chose then, and it strikes me as equally unlikely in 2012 with a GOP House majority. Going over the cliff requires Democrats to take ownership of raising taxes on the middle class at Christmas. That might be the strategically wise move for bolstering Democrats’ leverage come January. But it also strikes me as an electorally doubtful holiday gift to voters.

I’m not so sure about that. In this case, I think I’m with the folks who like to refer to this event as a fiscal slope rather than a fiscal cliff. Their general point is that we don’t all suddenly pay thousands of dollars in taxes and cut billions of dollars in spending at the stroke of midnight on January 1st. This stuff all phases in over time.

That’s true, and I doubt very much that there would be any serious consequences to doing a deal in February or March instead of December. In the particular case of taxes, the only thing that happens on January 1st is that withholding rates would go up slightly — and maybe not even that. The IRS has a fair amount of latitude to leave withholding rates alone for a few months if it wants to. Either way, this means that Democrats don’t really have to worry about “owning” the expiration of the Bush tax cuts for quite a while. (The payroll tax holiday also expires on December 31, but that was always unlikely to be extended anyway. It doesn’t have much to do with the fiscal cliff.)

For a few months, then, taxpayers won’t see much impact. Maybe none at all. As a result, I think Democrats could pretty safely stick to their guns and extend negotiations into 2013 without much risk. At that point, with the Bush tax cuts gone and rates back up to their Clinton-era levels, they’ll still have to convince Republicans to introduce a bill that cuts only the middle-income rates, not the top marginal rates, and that won’t be easy. But Republicans will be under as much pressure as Democrats by that point, and they might very well be willing to do a deal.

In short, as long as the composition of Congress doesn’t change dramatically, I don’t think the calculus is much different before and after January 1st. The cliff doesn’t really start to get scary until later in the year.

1This entire post is predicated on the likelihood that Obama will win reelection and the House will remain fairly solidly in Republican hands. If either of those doesn’t happen, the legislative calculus changes completely.

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