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The Fiscal Cliff Showdown Will Set The Agenda For The Next Four Years

Memo Pad

The Fiscal Cliff Showdown Will Set The Agenda For The Next Four Years


As part of the series “A Rooseveltian Second Term-Agenda,” a look at the four biggest budget issues that will be debated in the next four months.

The very next day after the election, congressional leaders held dueling press conferences in Washington to start the stampede to the fiscal cliff. But December 31st is not a cliff… it’s a slope. Actually, the better metaphor is a showdown between two different visions for the country—a showdown that will not only take place over the next four months, but will dominate debate about the economy for the next four years.

It is true that if Congress allows the tax hikes and spending cuts to be fully implemented, the economy will go into a tailspin, with four million people forced out of their jobs. But that won’t happen on January 1st. The impact of both tax hikes and spending cuts takes time to accumulate. If Congress acts on taxes early in the year, it can make lower tax rates retroactive to the beginning of the year. Between federal contracts already in place and the time it takes to implement program cuts, budget cuts too will take a while before they slow down the economy. Better for Congress to walk down and back up the slope early in the year than be stampeded into bad decisions.

In this showdown we have a choice between two paths: prosperity for working families and the middle class or more for millionaires and CEOs. While the showdown will play out in the next few months, the issues will continue to set the economic agenda for the president’s second term. Both the immediate and continued battles will be over four issues: taxes, social insurance, federal discretionary spending, and investments to create jobs.

1. Taxes: The immediate battle will be whether or not to end the Bush tax rates on incomes over $250,000. The president has rightly made this his line in the sand. If Republicans don’t budge, Democrats should wait until next year when all the Bush tax cuts expire, forcing House Republicans to continue to protect tax preferences for the wealthy while taxes go up on working and middle-class families.

The four-year agenda is to restore progressivity to the tax system. Progressives should define tax reform as taxing wealth at the same rate as income from work and enacting higher rates on the highest incomes. With corporate taxes the lowest they have ever been as a share of federal revenue, our agenda should be to end the loopholes and tax preferences for corporations that ship profits and jobs overseas and the breaks from exploiting our natural resources. We should raise more money from a loophole-free corporate tax system.

2. Social insurance: The big three social insurance programs—Social Security, Medicare, and Medicaid—are all protected from the automatic spending cuts, but that hasn’t stopped deficit hawks from trying to bring them into the upcoming debate. Changes to Social Security, like the Simpson-Bowles plan’s “adjustments” to the COLA (cost of living adjustment) that will result in 15 percent or more cuts in benefits to middle-class recipients, may well be put on the table as part of a “grand bargain.” Democrats should follow Senate Majority Leader Harry Reid, who declared that Social Security is not on the agenda. Over the next four years, progressives should push for the obvious fix to the projected shortfall in the Social Security trust fund: raising or eliminating the cap on how much of earnings are subject to Social Security payroll taxes. That solution would extend the life of the trust fund to 2075 and beyond. It is politically popular, easy to explain, and fits within the broader progressive theme of a tax system that bolsters working families and the middle class by requiring a little more from those with more.

While Social Security does not add a dime to federal deficits, the same can’t be said of the rising pressures of health care spending on Medicare and Medicaid. Both programs should remain off the immediate fiscal showdown agenda, with Democrats pointing out that health care inflation over the past two years is at the lowest level in decades. Some of that is because of changes being put in place by the Affordable Care Act, which has a number of measures to control health care spending in Medicare by eliminating wasteful care and overpayments to health insurance companies. The big agenda for the next four years on health care is to continue to accelerate the changes put in place by the ACA, including that new panel—which the right likes to demonize—that will push Medicare to force providers to provide better care or see their revenues drop. Another top priority is for the federal government as well as states to follow what Massachusetts is doing: use the new health care marketplaces to review health insurance company rate increases and pressure health care providers to provide better quality care at lower cost.


  1. Daniel Jones November 16, 2012

    These steps are also notable for being a spit in the face of the power-brokers that have been steadily bankrupting the country for their own profit.

  2. Lynda November 16, 2012

    Just for fun let me offer a possible compromise for the parties to consider. Drop the top marginal tax rate to 28%. Drop the business tax rate to 25%, with fewer deductions. Raise the capital gains and earn interest rates to 28%, of which 6 to 8% would flow into the Social Security and Medicare trust funds. Remove the cap from payroll deductions for Social Security and Medicare, thus providing funding as far as the eye can see. Entitlements would be taken care of and not require the action, or inaction, from Congress for a very long time. They should not be messing with those in the first place. Congressional leadership seems to like simple solutions to complicated problems so I’ve offered simple solutions.

    1. Arlene Gibbon November 19, 2012

      Just drop all the “nonsense” and start working together for the good of our “COUNTRY” not the parties!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    2. Dominick Vila November 19, 2012

      Lynda, the solutions you offered are far from being simplistic. In fact, they encompass many of the things that must be done to get us out of the mess we are in. The only thing I would add is the need to fund and/or encourage capital investment. If the private sector remains reluctant to invest, the only option left is for the public sector to step in to get things moving until market forces take over. It is refreshing to see someone offer specifics ideas, instead of the empty rhetoric that characterize debate on issues like this. Thank you for the great post.

    3. Bill November 20, 2012

      I doubt that many of the 1% would like that deal. The marginal tax rate is meaningless to people of Romney’s wealth. HIs 2010 tax return showed $21mm in income of which over 95% was from Interest Payments, Dividends and Capital Gains, all taxed currently at 15%. Romney’s marginal tax rat could have been 50% and he still would have paid only 14% or so. The raise in the Capital Gains and Interest tax rate would raise his taxes a lot more so the 1% would lobby against this change.

  3. Dominick Vila November 19, 2012

    After some initial posturing by both sides, designed to reassure their respective constituencies, I expect a compromise that is bound to raise eyebrows on both sides. The GOP will agree to the 3% tax increase for the wealthiest Americans, but they are going to demand significant spending reductions in entitlements that are bound to anger many Democrats. An agreement will be reached, but we are going to pay a price for it. There is no easy way out. We are paying for the consequences of decades of irresponsible fiscal policies, borrowing, trade imbalances, neglecting our infrastructure, ineefective regulation and regulatory controls, and our options now are either pay the piper or default.

    1. Jim Lou November 19, 2012

      I hear that there is a move to move the date of Fiscal Cliff to later next year.

      This is just postponing. This will happen again and again.

      1. Dominick Vila November 19, 2012

        Bear in mind that the same Republicans that are now adamant about the implementation of Tea Party spending reductions, are the same ones that were planning to forego those reductions to make it easier for a President Romney to govern. The issue for some of them is not fiscal integrity, but making President Obama’s chances of success as difficult as possible.

  4. gargray November 19, 2012

    Don’t these people know we paid for our Social Security? The best insurance plan we have.

  5. rustacus21 November 20, 2012

    The best thing Liberal/Progressives, Democrats & Independents can do for the nation is totally & completely ignore Republicans thru this process & craft policies they “KNOW” will work. Between 2001-2009, Republican conservatives kept making promises that ‘prosperity’ was just on the horizon. Then, when President Obama & then the T-party came on the scene, conservatives DEMANDED we maintain their fiscal & economic policies of the previous 9 years. All that happened was the continuation of suffering & ruin, except in the areas President Obama, w/assistance of Democratic & Independent legislative law-makers. It’s time we just tell them, thanx, but no thanx!!! We (the sane & rational) got this, so sit back & watch while we put “progressive” “positive” action to the rhetoric…


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