If Democrats and Republicans do not come to an agreement at the beginning of 2013, the United States could come to what is known as a fiscal cliff.
On Jan. 1, the Bush era tax cuts will be repealed. Both Democrats and Republicans are saying they want to make a deal to avoid this fiscal cliff. Whether they come to a deal before the new Congress gets sworn in on Jan. 3 or not will affect what the deal looks like.
“Whether something happens before Jan. 3 or after makes a fair bit of difference in what the deal will look like,” said Mack Shelley, university professor of political science and statistics. “The Republicans are going to be in a weaker bargaining position [after Jan. 3] because there will be fewer of them. That’s an incentive for the House Republican leadership to try to get as many votes as they can for a compromise before Jan. 3 rolls around.”
Currently, the Democrats wish to raise taxes on households making more than $250,000.
“The Republican leadership both in the House and the Senate has made it very clear that they want to try to make sure that the tax rates don’t increase,” Shelly said.
“The easy solution would be to not increase the tax rates but to reduce tax deductions, which keeps the percentage rate the same but arguably would bring in more revenue,” Shelley said.
Joydeep Bhattacharya, professor in economics, said that “raising taxes on people who make more than $250,000 alone is not going to be anywhere close to enough.”
The current plan on spending cuts is an equal amount of cuts to both defense and non-defense, calling for about $500 billion to each.
“If you sort the budget into defense and everything else, only about 20 percent of the non-defense budget is discredible under current law. Things like food stamps are cuttable. Things like Medicare and Medicaid are not cuttable,” Shelley said. “Almost any kind of deal is going to involve cutting things like food stamps and farm commodities and such things.”
Bhattacharya said these cuts are going to have an impact on our economy.
“It’s the spending cuts that are going to hurt a lot more. Defense cuts means defense contractors are not going to get their money. If there’s not enough money to pay them, it means they are not going to hire people. Defense is a huge industry,” he said.
He said this will have a similar effect on other cuts, such as national parks. However, even these will not be enough.
“You’re not going to tax your way out of this problem; you’re not going to reduce your spending and get out of this problem, directly. It has to come from changes in the entitlement programs, like Social Security, Medicare and Medicaid,” Bhattacharya said.
Bhattacharya pointed out that our national debt is often misunderstood.
“We aren’t really losing. It’s going towards interest payments on the debt. Not all of that is held by foreigners. A lot of this debt is held by Americans,” Bhattacharya said.
“What is true is that this money could be used for something else, but what I’m saying is that it is not accurate to describe it as a leakage from the system and that this money just disappears. The part that is held by China and foreign governments is overblown. I think the actual number is 30 or 35 percent. It’s only that that leaves the country; the rest goes to you and me.”
Bhattacharya also said that fiscal cliff is not an accurate term. Fiscal slope is more telling of the situation.
“Since it’s not a cliff, politicians actually have a little more time than people are led to believe,” he said. “Even if the tax rates go up, it’s not going to affect your taxes in April.”
When it comes to negotiating the deal, it appears the Democrats have an upper hand.
“The Democrats are in an almost delicious position that, according to public opinion polls, something like 60 percent of the public would blame Republicans if we do fall of the fiscal cliff. They’re not going to blame the Obama administration,” Shelley said.
Bhattacharya said the situation could help the United States in the future.
“If you go with the idea that crisis brings reform, then we have a crisis, let the reform happen. It will help us down the road… it will pave the way for more reform,” Bhattacharya said. “You don’t want to waste a crisis.”