Scenario 1: Go Off the “Fiscal Cliff”For starters, what is the “fiscal cliff” and what happens if we go off it? Simply put, at the beginning of 2013 multiple tax hikes are set to take place as well as a number of automatic cuts in government funding, mostly in Defense spending. The deal was set in place back in 2011 by House Republicans in exchange for raising the debt ceiling. Needless to say, Republicans have always been relatively poor at negotiating and their dealings with President Obama has been no exception.
Starting in 2013 the Bush tax cuts are set to finally expire, after President Obama last signed an extension of the cuts back in 2010. This will raise everyone’s taxes at every level. Republicans initially wanted an extension of all the tax cuts, but have since floated letting the rates on $1M+ earners lapse. Obama initially argued for raising taxes on everyone making over $250,000 (or as he calls them “millionaires and billionaires”) but that figure has seen opposition by many Democrats in high cost-of-living states, including Sen. Chuck Schumer (D-NY). Additionally, the 2% payroll tax is set to expire with seemingly little opposition from either party, and a boat-load of new taxes are set to take place under the Obamacare law. Those taxes were conveniently delayed for three years until after Obama’s re-election.
As for the spending cuts – or sequestration - a large chunk of the automatic cuts is set to come from Defense spending. While Republicans clearly want to prevent this, President Obama has no problems with sequestration taking place. Some other cuts would come in other non-discretionary spending. While the “cuts” would total $1.1 trillion over a decade, in reality spending would remain relatively flat as the federal government does not do baseline budgeting. Instead, most of the cuts merely are in the reduction of the growth of spending, as opposed to actual spending from the prior year.
Why the Republicans LoseFirst, President Obama gets what he wants. Everyone knows Obama wants massive tax increases to take effect. In an interview with the Des Moines Register, Obama revealed that some of the budget problems would be fixed when what we now call the “fiscal cliff” actually happens: “So when you combine the Bush tax cuts expiring, the sequester in place, [my] commitment … to reduce the deficit, we’re going to be in a position where I believe in the first six months we are going to solve that big piece of business." Of course this statement happened in an originally off-the-record interview where he completely reversed his “public” position of the campaign from a night earlier where he argued against letting either happen. Needless to say, the media were never too interested in this telling admission.
Not only would Obama essentially get what he wants, but Republicans will subsequently get the blame for “holding hostage” the middle class for “tax cuts on the rich.” Despite the efforts of the Republicans to find a balanced approach, Obama already has an acceptable outcome at his disposal: going off the fiscal cliff. Obama will claim the GOP let it happen – despite offering little negotiating in return – and the media will happily report to his satisfaction.
Scenario 2: A “Deal” is Reached
This scenario is another loser for Republicans. Any deal will undoubtedly favor President Obama and the Democrats. The only negotiating tactic the Republicans have is to avoid going over the fiscal cliff, which Obama probably has little problem doing anyway (especially when he can successfully blame Republicans for any repercussions of doing so and get away with it). The Republicans clearly have more to lose by going over the fiscal cliff than Democrats do, but avoiding the fiscal cliff will be little better for them.
Not all of the Bush tax cuts will be extended in any deal, that's a pretty safe guarantee. Now the debate is how close they get. Again, the GOP are sub-standard in negotiations. For instance: Republicans started at where they wanted (extending all tax cuts) while Obama started at hikes that were below what was even acceptable to many liberal Senate Democrats ($250,000), and then has slowly raised the tax hike minimums upward (one counter-offer was $400,000). See, isn’t Obama being “reasonable?” Senate Democrats refused to take up Obama's plan in the bill in the Senate because it was so irrational and they did not want to be caught having voted for most of the stuff in the bill. They called the GOP efforts to vote on the Obama-proposed bill, which would have enough votes to pass, a "ploy." No, not making this up.
Aside from tax hikes, there will undoubtedly be a massive hike in the debt ceiling (there always is) and there will probably be no real entitlement reforms or spending cuts. Most of the “cuts” offered are from programs that are already expected to expire, defense operations that are set to wind down, cuts in healthcare entitlements that were already passed in other legislation, and mythical “cost savings” by making government “more efficient” or cutting out “fraud and abuse.” Again, assuming even a fraction of those cuts would ever materialize all of the cuts are after automatic yearly raises are calculated in anyway. In other words, Republicans will get little out of the deal but empty promises, and Obama gets mostly everything he wants still.