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THE MUSINGS OF A TRADITIONAL SOUTHERN DEMOCRAT

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Sid in his law office where he sits when meeting with clients. Observant eyes will notice the statuette of one of Sid's favorite Democrats.

Saturday, October 27, 2012

Sign me up (except for estate tax rates reverting): Meet the fiscal cliff-divers, who think jumping off could be our best bet

From The Washington Post:

The very notion of a “fiscal cliff” suggests that the country is approaching a calamitous drop-off at the end of the year — and it would be tantamount to suicide to jump off.

But a contingent of policy wonks and Democrats insist that letting the Dec. 31 deadline come and go — thus triggering automatic tax increases and spending cuts — could produce the best outcome for the country. Once the tax hikes have kicked in, the reasoning goes, Republicans would be hard-pressed to roll them all back and would have to accept a deal on taming the deficit that contains more new tax revenue than GOP lawmakers want.

So some policy analysts and legislators say they are willing to go over the brink—and some are even gunning for Congress to do it.

Call them the cliff-divers.

“It will be much easier to negotiate a budget deal going over the cliff,” said William Gale, an economist at the Brookings Institute and former adviser to George H.W. Bush. “It seems to be the only way we can boost revenues.”

”I wouldn’t say it’s desirable, but it may be necessary,” explains former White House budget director Peter Orszag, who believes that going past the Dec. 31 could produce the best policy outcome in the face of a political stand-off.

In an ideal world, these figures would want Congress to reach a reasonable deal before the deadline. But they are skeptical that will happen, given the politics surrounding the fiscal cliff, and argue that going over the cliff would remove what they believe is the biggest stumbling block.

Since individual tax rates would go up automatically—rising from 35 to 39.6 percent for the highest-income bracket and 10 to 15 percent for the lowest—Congress would technically be voting to cut them rather than raise them. It’s a distinction that the cliff-divers believe will make all the difference. “Republicans won’t have to violate their ‘no new taxes’ pledge,” says Gale. “The politics are a lot easier and the incentives are a lot stronger.”

President Obama, for his part, promised to veto any legislation that kept the cuts for the wealthy intact.

The cliff-divers don’t deny that the fiscal cliff would deal a serious blow to the economy, knocking the US back into a recession if the spending cuts and tax hikes remain in effect for all of next year. But these advocates say the immediate risk is overblown.

The cliff-divers worry, moreover, that rushing to meet fiscal cliff deadline at all costs could convince Congress to accept a subpar deal.

While they don’t think Dec. 31 is a drop-dead deadline, the cliff-divers also don’t believe that Congress has all the time in the world: They say Congress has a few weeks, at most, to work out a deal before the fiscal cliff starts to do real harm to the economy and the markets. “We won’t go over the fiscal cliff for very long,” concluded Gale.

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