What is Fiscal Cliff 2013: The 8 Most Important Things You Need to Know

A New York Times article lays out the state of play in the negotiations to avoid the fiscal cliff. Democrats believe they have a controlling hand and are moving aggressively to impose their will on the process. We now know that the president has decided to eschew bi-partisanship believing he has a clear mandate based upon the 2012 election. Some observers, including this writer, had hoped for a more inclusive and conciliatory process.

The conversations have been difficult to follow because there are so many moving parts and negotiating nuances. Moreover, now that the elections are behind us, the electorate is out of the loop. The result is a lot of misinformation and spin.

Hopefully, this essay will clear up a number of things relating to each party’s negotiating posture and facilitate some debate, not that our leaders or Congress care about our opinions.

1. Avoidance of the fiscal cliff is the most important short-term objective for everyone in Washington. If a deal is not consummated by the end of the year, the Bush-era tax cuts for all Americans will be rescinded and draconian spending cuts will be implemented. Some say these actions will result in another recession; others think the fiscal cliff bogeyman is an exaggeration. The financial markets will certainly be disrupted if a solution is not found, if only for a short while, but the reduction in tax benefits and decreased spending will have a positive impact on the deficit.

2. Republican leverage: If a deal is consummated by December 31 is a paramount consideration for the leaders of both parties. Republicans will lose or gain leverage depending upon what issues they negotiate in the next few days. The most important is the extension of the tax breaks for the 98% without dealing with the 2%, and the next is a long-term extension of the debt ceiling issue. Democrats are striving to eliminate future obstruction by their opponents by settling these issues now. Americans should not be comfortable with a Democratic promise to cut spending adequately without Republican pressure

3. A tax extension for those earning less than $250,000 would take care of 98% of households and 97% of small businesses. No disagreement exists relating to this issue. Both parties want to facilitate this action. The problem is that it is the primary negotiating point, and if Republicans agree to it, they will lose most of their leverage as indicated in the previous point.

4. A tax extension for these earning more than $250,000 is another important negotiating point. Until now, Republicans have resisted any income tax increase proposals, but they seem to be ready to yield tax benefits applicable to the rich such as mortgage interest deductions, charitable deductions, and capital gains. Democrats have insisted upon income tax increases for the rich, possibly influenced by special interest groups that object to the other alternative, because it is philosophically important to them. Unfortunately, this ideological resistance could ultimately derail the negotiations. Democrats and liberals want to increase the tax rates for the rich, even if other means are available and the amount of revenue is not sufficient to make a large enough impact, to fulfill a class warfare promise.

5. The use of reduced tax benefits to increase revenues seemed to be gaining momentum as an alternative to increasing tax rates on the wealthy. Disappointingly, Senator Max Baucus (D Mont.), Chairman of the Senate Finance Committee rejected a Republican proposal to cap tax deductions and credits at $25,000 in lieu of tax hikes. Baucus indicated that his objection was based upon the fact that some middle class households would be impacted. The real reason for his objection is ideology, as the impact on middle class families could easily be eliminated.

6. A long-term extension of the debt limit is a huge item for Republicans. Actually, they could accept assurances from Democrats to make future spending cuts if they retained the ability to shut down the government by refusing to increase the debt limit; it will surely need to be increased in 2013. Obama appreciates the fact that the debt ceiling could be a large distraction, so he wants it off the table now.

7. Medicare and Medicaid reform is not something the Democrats want to deal with at this time. Republicans are sure that if it is not part of the short-term solution, it will be kicked down the road for the balance of the Obama tenure. Given that reform of these two entitlements is so important to the fiscal well being of our nation, Republicans will likely fight to incorporate some reform into the current negotiations.

8. The future efforts to reduce spending by $4 trillion (or more) will diminish if Republicans have no leverage. Moreover, spending cuts will, no doubt, be pared back if Democrats are allowed to dominate the agenda. Our country must reduce spending and not gamble that an economic recovery will bail out the country. Republicans would be wise not to cede this responsibility to Democrats.

This round of negotiations is crucial to the GOP. If it cedes too much control to its opponents, the financial agenda of the country will be out of their hands completely until at least the 2014 elections. The ability to obstruct and derail irresponsible spending is definitely not something the minority party should give up, even if the threat of the fiscal cliff must be used.

The president does not have as much power as he thinks he has, yet. His swagger and fiery rhetoric should be diminished during the next few weeks.