Can Congress and the White House come to an agreement to avoid the fiscal cliff? Do some Democrats prefer to go over it first? Politico reports that members of Democratic leadership on Capitol Hill are taking an all-or-nothing approach to the negotiations, following the rhetoric of Barack Obama in insisting that tax rates have to go up or there won’t be a deal before the end of the year:
A growing bloc of emboldened liberals say they’re not afraid to watch defense spending get gouged and taxes go up on every American if a budget deal doesn’t satisfy their priorities. …
Bolstering the Democrats’ strategy is the belief that the “fiscal cliff” is actually shaped more like a “slope” where the economic effects will be felt gradually, not immediately. That theory gives Congress some time at the beginning of 2013 to set tax rates and configure budget cuts in a different political environment and with a new class of lawmakers.
But underlying the tough talk is also a sense of liberal angst — the left feels like it was burned by the last extension of the Bush tax rates and didn’t get much of what it wanted in the 2011 debt-limit deal.
If tax rates snap back to the higher levels from the 1990s and painful budget cuts start to hit the Pentagon, these Democrats — led by Washington Sen. Patty Murray — believe they would wield more leverage over the GOP to enact a budget compromise on their terms. And with a January deal, Republicans would technically avoid violating the no-new-taxes pledge that most of them have signed because they would then be voting to cut taxes.
Unfortunately for Murray and the Democrats, the White House released a report today that undermines their “slope” argument. Via TPM, the report concludes that just the middle-class tax hikes alone could cut consumer spending by $200 billion in 2013, a drop of 1.7% that would provide a huge push into recession:
Allowing the middle-class tax rates to rise and failing to patch the Alternative Minimum Tax (AMT) could cut the growth of real consumer spending by 1.7 percentage points in 2013. This sharp rise in middle-class taxes and the resulting decline in consumption could slow the growth of real GDP by 1.4 percentage points, which is consistent with recently published estimates from the Congressional Budget Office.
Faced with these tax hikes, the CEA estimates that consumers could spend nearly $200 billion less than they otherwise would have in 2013 just because of higher taxes. This reduction of $200 billion is approximately four times the total amount that 226 million shoppers spent on Black Friday weekend last year. As Figure 5 shows, this $200 billion reduction would likely be spread across all areas of consumer spending.
That shows the stakes involved in this particular cliff dive. If those rates hit at the beginning of the year, they will act immediately to depress consumer spending, as families have to plan for a much larger tax bite and start sheltering cash. That will result in layoffs and investment flight, starting a cycle of recession and perhaps worse if allowed to pick up steam.
Furthermore, it’s a little curious as to what Murray and her cliff divers think will improve after the tax rates jump. It’s not as if the new Congress will have different leadership than this session, or a new President will take office. All of the players will remain the same, as will their constituencies. If anything, the impact of the tax rates will put the onus on the President to stop the damage, not House Republicans, who only control one lever of power in Washington to Democrats’ two. Especially by going public with this strategy, Murray seems determined to have her fellow Democrats take most of the blame when the inevitable sudden stop occurs at the end of a cliff dive.