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Tags: Fiscal | Cliff | Crisis | End

Scenarios: Seven Ways the Fiscal Cliff Crisis Could End

Friday, 21 December 2012 01:36 PM EST

So what now?

The U.S. House of Representatives' rejection of a bill to raise taxes on just 0.18 percent of Americans — those making more than $1 million a year — has raised questions about the Republican-led chamber's ability to approve any plan to avert the looming fiscal cliff.

Unless President Barack Obama and the U.S. Congress can forge a deal during the Christmas and New Year's holiday season, the largest economy in the world could be thrust back into a recession because of the steep tax increases and spending cuts that are due to begin in January.

The threat of across-the-board government spending cuts and tax increases — about $600 billion worth — was intended to shock Democrats and House Republicans into moving past their many differences to approve a plan that would bring tax relief to most Americans and curb runaway federal spending.

For weeks, Obama and House Speaker John Boehner, the top Republican in Congress, have struggled to find a compromise.

After a glimmer of hope that a deal was close, Boehner — apparently under pressure from anti-tax House Republicans aligned with the conservative Tea Party movement — pressed the "pause" button on negotiations. He then tried to push a backup plan through the House late on Thursday, only to see his fellow Republicans kill it.

While the House is controlled by the Republicans, the Senate is controlled by Obama's fellow Democrats.

Where do Obama and Congress go from here? Here are some possible scenarios.

• Obama and Boehner go back into their secret negotiations.

Before Boehner started touting his failed "Plan B" to boost taxes on those who make more than $1 million, he and Obama were moving closer together on a plan to raise taxes on certain high-income Americans and cut spending. They could pick up where they left off and quickly cut a deal to bridge the gap.

But a compromise with possibly $1 trillion in new taxes and $1 trillion in new, long-term spending cuts could be a tough sell for both Republicans and Democrats in Congress.

Boehner would have to sell enough Republicans on the idea of tax increases. Obama, meanwhile, would have to get Democrats in Congress to back cuts to some social safety net programs such as Social Security pensions and Medicare and Medicaid health insurance for the elderly and poor. House Republicans appear to be the tougher sell.

• A huge drop in the stock market drop sends a loud message to Washington politicians to stop arguing and cut a quick but meaningful deal.

That is what happened in late September 2008, after Congress rejected a massive financial bailout package despite warnings by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson of an economic collapse if the bill failed.

The Dow Jones Industrial Average plunged more than 700 points and Congress quickly reversed course, approving the $700 billion Troubled Asset Relief Program just days later.

The "fiscal cliff" may not be as dramatic a situation, but the tax increases and cuts in federal spending could deal a stiff blow to the economy.

• No deal happens in the dwindling days of 2012 and the U.S. government jumps off the fiscal cliff — at least temporarily.

On Jan. 1, income taxes would go up on just about everyone. During the first week of January, Congress could scramble and get a quick deal on taxes and the $109 billion in automatic spending cuts that most lawmakers want to avoid.

Why could they reach a deal in January, if they fail in December?

The reason would be that once taxes go up, it would be easier to allow a few of those increases to remain in place - mostly on the wealthy - and repeal those that would hit middle- and lower-income taxpayers.

Such a scenario would mean that no member of Congress technically would have to vote for a tax increase on anyone — taxes would have risen automatically, and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.

• No deal occurs for another six weeks or so.

If Congress does not raise the nation's debt limit, by mid-February the Treasury Department likely would exhaust its ability to borrow. That would put the nation at risk of defaulting on its debt.

Republicans have withheld their approval of the debt-limit increase as leverage to try to get the kind of "fiscal cliff" solution they want: Fewer increases in spending and taxes, and more cuts to Social Security, Medicare and Medicaid.

This is the strategy they employed in mid-2011 during the last fight over the debt limit, which is about $16.4 trillion.

Republicans wrung spending cuts out of Democrats in return for new borrowing authority, but paid a political price. Global financial markets were rocked by the long uncertainty brought on by the standoff in Congress, one ratings agency downgraded U.S. credit standing and Republicans saw their public approval ratings sink.

• Boehner decides on a gutsy move: Call a House vote on a bill that would raise tax rates for families with net annual incomes above $250,000, exactly what Obama has sought.

The plan could pass the House with strong Democratic support and some Republican votes. As soon as it passed, the House likely would leave town for the rest of the year without addressing other Obama priorities, such as increasing the government's debt limit.

• A partial deal is struck at any point.

Congress could pass a plan that would put off most of the income tax increases that are due in January, or extend some other expiring tax breaks - namely one to prevent middle-class taxpayers from being subject to higher tax rates aimed at the wealthy under the alternative minimum tax.

• Stock markets do not tank and Washington politicians conclude that the "fiscal cliff" is not such a bad thing.

Under this scenario, Congress and the White House could continue sniping at each other throughout 2013 and 2014 as they try to revamp tax policy and impose long-term spending cuts.

© 2024 Thomson/Reuters. All rights reserved.

The U.S. House of Representatives' rejection of a bill to raise taxes on just 0.18 percent of Americans - those making more than $1 million a year - has raised questions about the Republican-led chamber's ability to approve any plan to avert the looming fiscal...
Friday, 21 December 2012 01:36 PM
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