Efforts to save the nation from going over a year-end “fiscal cliff” were in disarray as lawmakers fled the Capitol for their Christmas break. “God only knows” how a deal can be reached now, House Speaker John A. Boehner declared.
President Obama, on his way out of town himself, insisted a bargain could still be struck before Dec. 31. “Call me a hopeless optimist,” he said.
Here is a look at why it’s so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what will happen if they fail to meet their deadline:
New Year’s headache
Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and the president act to stop them. They include:
• Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and tax breaks expire at year’s end.
• About $110 billion in spending cuts divided equally between the military and most other federal departments. That’s about 9 percent of the annual budget for the Pentagon, about 8 percent for the others.
Hitting the national economy with that double whammy of tax increases and spending cuts is what is called going over the “fiscal cliff.” If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict.
What if they miss the deadline?
If New Year's Day arrives without a deal, the nation shouldn’t plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.
As long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could be held at bay for a few weeks. Then they could be repealed retroactively once a deal is reached.
The big wild card is the stock market and the nation’s financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped Friday after House Republican leaders’ plan for addressing the fiscal cliff collapsed.
What if they never agree?
If negotiations between Mr. Obama and Congress collapse completely, 2013 looks like a rocky year.
Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the nonpartisan Tax Policy Center. Because consumers would have less in their paychecks to spend, businesses and jobs would suffer.
At the same time, Americans would feel cuts in government services, some federal workers would be furloughed or laid off, and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.
“The consequences of that would be felt by everybody,” Mr. Bernanke says.
Much of the disagreement surrounds the George W. Bush-era income tax cuts, and whether those rates should be allowed to rise for the nation’s wealthiest taxpayers. Both political parties say they want to protect the middle-class from tax increases.
Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families are also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 percent to 55 percent. Some corporate tax breaks would end.
The temporary Social Security payroll tax cut also is due to expire. That tax break for most Americans seems likely to end even if a deal is reached, now that Mr. Obama has backed down from his call to prolong it as an economic stimulus.
If the nation goes over the fiscal cliff, budget cuts of 8 percent or 9 percent would hit most of the federal government, touching all sorts of things from agriculture to law enforcement and the military to weather forecasting. A few areas, including Social Security benefits, Veterans Affairs and some programs for the poor, are exempt.
Call the whole thing off?
In theory, Congress and Mr. Obama could just say no to the fiscal cliff by extending all the tax cuts and overturning the automatic spending reductions in current law. But Republicans and Democrats agree that it is time to take steps to put the nation on a path away from a future of crippling debt.
Indeed, the automatic spending cuts set for January were created in August 2011 as a last-ditch effort to force Congress to deal with the debt problem.
If Washington bypasses the fiscal cliff, the next crisis would be just around the corner, in late February or early March, when the government reaches the $16.4 trillion ceiling on the amount of money it can borrow.
Mr. Boehner says Republicans won’t go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.
To avoid that scenario, Mr. Obama and Mr. Boehner are trying to wrap a debt limit agreement into the fiscal cliff negotiations.
So what’s the holdup?
They’re at loggerheads over some big questions.
Mr. Obama says any deal must include higher taxes for the wealthiest Americans. Many House Republicans oppose raising anyone’s tax rates. Mr. Boehner tried to get the House to vote for higher taxes only on incomes of more than $1 million but dropped the effort when it became clear he didn’t have the votes.
Republicans also insist on deeper spending cuts than Democrats want to make. And they want to bring the nation’s long-term debt under control by significantly curtailing the growth of Medicare, Medicaid and Social Security — changes that many Democrats oppose.
Mr. Obama, meanwhile, wants more temporary economic “stimulus” spending to help speed up a sluggish recovery. Republicans say the nation can’t afford it.
Time for deal-making is short, thanks to the holiday and congressional calendars. Some key dates for averting the fiscal cliff:
• Lawmakers are expected to return to the Capitol after Christmas, leaving less than a week to vote on a compromise before year’s end.
• Mr. Obama and his family are in Hawaii for Christmas. The president said because the fiscal cliff was still unresolved, he would return to Washington sooner than planned.
• If lawmakers don’t reach a deal by Dec. 31, some economists worry that the financial markets might swoon.
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