The Fiscal Cliff Negotiations: Political Theater and the Taming of the Heads

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Both sides have cards to play, but with automatic spending cuts and tax increases set to start January 1, Obama has the upper hand. Photo credit: The White House from Washington, DC

In Greek mythology, the Hydra was a serpent with multiple heads — by some counts, up to 100, although most versions of the story characterize it with nine — which lived in swamps, had noxious breath, and was ultimately slayed by the great warrior Hercules.

The political version of the Hydra has literally hundreds of heads, and after a Beltway lunch, pretty fetid breath. Unlike the Greek version, however, it is forever invincible.

The best that can be hoped for is taming enough of the heads to work out a solution to the oft-cited “fiscal cliff” over the next three weeks, so that the United States is not forced over the cliff before more reasonable heads prevail.

Fiscal Cliff: First and Foremost, What Is It?

Quite frankly, the showdown was intentionally created by Congress and the Obama administration in a negotiated maneuver to put a metaphorical gun to their own heads.

After kicking the can down the road a few times with respect to how to deal with the expiring Bush tax cuts as well as the debt crisis, and with a congressional supercommittee unable to agree upon negotiated cuts to spending demanded by Republicans as quid pro quo in order to  increase the debt ceiling, a series of tax increases, automatic spending cuts and special benefits eliminations are set to automatically occur starting on January 1, 2013.

A list of the primary drivers toward the impending cliff are as follows:

    • Expiration of the Bush tax cuts
    • $1.2 trillion in automatic spending cuts over ten years
    • Recasting of the Alternative Minimum Tax to 2000 levels
    • Certain key Medicare changes
    • Sunset of the 2% payroll tax cut
    • Expiration of unemployment benefits extensions
    • Elimination of the federal renewable energy tax credit
    • Obamacare tax increase

Although colloquially referred to as a ‘cliff’, it’s more of a slope — at first. The automatic spending cuts (otherwise known as sequestration) start next year, hitting defense (9.4%) and non-defense spending (8.2%) almost equally. Medicare will see a 2% reduction in its budget, adversely affecting seniors. On the revenue side of the equation, the Bush tax cuts — across-the-board decreases in taxes enacted in 2001 and 2003 — expire as of January 1. The payroll tax holiday passed in 2010 and extended in 2011, ends with the advent of the new year.

With these and the other impacts set to hit the economy, the budget deficit is projected to decrease dramatically. According to a report by the Congressional Budget Office, it could shrink by as much as $600 billion in 2013 alone. Unfortunately, so would the economy, as the resulting shock is projected to thrust the U.S. economy back into recession.

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