The danger of the U.S. economy falling off a cliff has ignited debate inside the Beltway, as Democrats and Republicans sharpen their swords for a duel over the presidency.
Following reports that Republicans may cave on their pledge not to include any additional revenue in the battle against the federal budget deficit, a senior Democratic Senator, Patty Murray, said on July 16 that Democrats were willing to allow a series of policies known as the “fiscal cliff” to be enacted if Republicans failed to give in to some Democratic demands. The fiscal cliff has become Washington, D.C. parlance for a series of automatic spending cuts required on January 1, 2013—a result of last year’s failed Super Committee negotiations—plus a series of tax cuts set to expire at the end of this year. Economists have noted that the combined impact would result in a greater-than-2% hit to U.S. gross domestic product, likely pushing the nation back into a recession that rivals the severe downturn of 2008 and 2009.
Sen. Murray is the fourth-highest ranking Democratic senator. Indicating that she would be unwilling to adopt a plan that fails to include some additional revenue, she said, “I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle-class families under the bus.”
President Obama reiterated that a major pillar of his re-election campaign will be his proposed policy of allowing tax cuts enacted by President Bush in 2001 and 2003 to expire for those couples making over $250,000. Recent polls indicate that Americans favor that policy by a 2–1 margin. Democrats in Congress have seized upon that populist message and the public support by pressing their case.
Murray, the chairman of the Senate Democrats' campaign finance committee and the likely next head of the Senate Budget Committee spoke at the Brookings Institution. Her remarks underscored Democrats' insistence that, unlike 2010 when they agreed to extend the temporary 2001 and 2003 tax cuts for another two years, any broad budget deal or even a replacement of spending cuts would have to include new revenues. “Unlike last year, the consequences of gridlock could start to be felt immediately. Millions of jobs could be lost through the automatic cuts, programs families depend on would be slashed irresponsibly across the board and middle-class tax cuts would expire. And once again, if Republicans won't work with us on a balanced approach, we are not going to get a deal,” Murray said.
Republicans have seized on Senator Murray’s message to once again assert that the Democrats were intent on using class warfare as a political issue, and in doing so were creating economic uncertainty that is certain to hurt the economy. They say that raising taxes on individuals making more than $200,000 and couples making more than $250,000 would have a corrosive impact upon self-employed smaller businessmen and businesswomen. Republicans believe this group is already bearing the burden of increased government regulation from the Obama administration and new taxes from the Affordable Care Act that will take effect in 2014.
Small businesses have been the traditional drivers of job creation in the United States. And Republicans assert that higher taxes will discourage new investments in small businesses and produce the result of few new jobs in a nation in which unemployment and underemployment are already very high. Sen. Orrin Hatch, the head Republican on the Senate Finance Committee, replied that “the American people understand that tax increases in the name of deficit reduction wind up being tax increases to fund larger government.”
Murray also appeared to shoot down another position of House Republicans, which includes a one-year extension of all of the 2001 and 2003 tax cuts with a promise that lawmakers will overhaul the complex code. “We absolutely need to reform the tax code. It's badly broken. But there is absolutely no reason—not one—that we need to extend the tax cuts for the rich as a precondition for reforming the tax code,” she said. Sen. Hatch, who spoke on the Senate floor later that day, accused Murray and Democrats of “playing games not only with the economy, but they are playing games with people's livelihoods.”
“This is a disgrace. The American people understand that tax increases in the name of deficit reduction wind up being tax increases to fund larger government. And the American people will have the last say on this,” Hatch said. He also argued that Democrats are primarily interested in politics and not policy. “The only real objection is that it diverts the president and his Democratic allies from their real pressing business, which is apparently getting the president reelected.”
Despite the partisan sniping, it is very unlikely that Congress will attempt to reform the tax code prior to the November elections. Furthermore, the six-week “lame-duck” session of Congress that follows the election is probably too short of a window to tackle anything other than the most urgent matters, which include the fiscal cliff. Most Congressional observers think that a short delay of the spending cuts, coupled with a one-year extension of most or all of the Bush tax cuts, will be approved at the end of the year, regardless of who wins the presidency.