The first is that we go off the cliff. That means lots of new federal revenues because EVERYONE's taxes will go up. In addition to income taxes, inheritance taxes would rise sharply. But on the other end, we'd lose the smaller tax cuts included in the Recovery Act: expansion of EITC, child tax credit, college tuition tax credit, wind tax credit. In addition, unemployment insurance would run out for millions of people and reimbursement rates for Medicare providers will drop sharply. Finally the sequestered cuts to both domestic and defense spending will go into effect.
Some liberals are suggesting that it would be better to simply go off the cliff. Most of them assume that after the new year, Democrats can simply propose a bill to provide tax cuts for income less than $250,000 and Republicans will pass it. You hear that kind of thing mostly from the very same poutragers who constantly berate President Obama for assuming the tea baggers can be reasoned with. So I'm sorry but I have to laugh at their assumption that all of the sudden those same baggers will be reasonable in the next Congress. I realize that most of them assume that the Republicans will have to vote FOR a tax cut. But that assumes that the opposition to President Obama has been ideological rather than strategic. What part of "the party of no" do these folks not comprehend? And what do these folks think will happen to unemployment insurance as well as all the other tax credits in that scenario? I'll tell you what will happen...nada.
The second scenario is the end-game President Obama has talked about. If the Senate can't come up with a deal, the Democrats will propose a bill that extends tax cuts on income under $250,000 as well as unemployment insurance - and essentially dare Republicans to oppose it.
That's not a bad deal. But just like going over the cliff, the other tax credits disappear and both scenarios leave the sequestered cuts to deal with after the first of the year.
Right now the 3rd scenario is still under construction between VP Biden and Sen. McConnell. As I understand that one - it would extend the tax cuts for incomes under $450,000. But it also increases taxes on capital gains/dividends for upper incomes as well as limiting their itemized deductions. There is some tinkering with estate taxes and a Medicare "doc fix" included as well. As important, however, it extends unemployment insurance and the tax credits from the Recovery Act (the latter for 5 years). On that one, I can't help but think about how it took folks like David Corn and Matt Yglesias almost two years to figure out what a great deal President Obama negotiated when he got those extended for 2 years in 2010 (some people never figured it out).
What seems to be holding up this third scenario is the question of what to do with the sequester cuts. President Obama talked about them in his remarks today.
And keep in mind that the threat of tax hikes going up is only one part of this so-called fiscal cliff that everybody is talking about. What we also have facing us, starting tomorrow, are automatic spending cuts that are scheduled to go into effect.Folks who are suggesting that Republicans got mad because Obama was so cheerful during his remarks are getting it wrong. They got mad because of this. The President just reiterated what he told Boehner during their negotiations...when it comes to resolving these tax cuts - he gets that for free. The "balance" comes into play when they start talking about spending cuts.
And keep in mind that some of these spending cuts that Congress has said will automatically go into effect have an impact on our Defense Department, but they also have an impact on things like Head Start. And so there are some programs scheduled to be cut that we’re using an ax instead of a scalpel. May not always be the smartest cuts. And so that is a piece of business that still has to be taken care of.
And I want to make clear that any agreement we have to deal with these automatic spending cuts that are being threatened for next month, those also have to be balanced, because, remember, my principle always has been let’s do things in a balanced, responsible way. And that means the revenues have to be part of the equation in turning off the sequester and eliminating these automatic spending cuts, as well as spending cuts.