Fiscal Cliff Update: Better to Go Over Than Accept a Bad Deal

12/30/2012 09:49 am ET Updated Mar 01, 2013
WASHINGTON, DC - NOVEMBER 16:  Senate Majority Leader Harry Reid (D-NV), Speaker of the House John Boehner (R-OH), and Senate
WASHINGTON, DC - NOVEMBER 16: Senate Majority Leader Harry Reid (D-NV), Speaker of the House John Boehner (R-OH), and Senate Minority Leader Mitch McConnell (R-KY) (L to R) speak to the media after meeting with U.S. President Barack Obama to discuss deficit reduction and economic issues at the White House in Washington on November 16, 2012. (Photo by Roger Wollenberg/Getty Images) WASHINGTON, DC - NOVEMBER 16: (L-R) Speaker of the House John Boehner (R-OH), Senate Majority Leader Harry Reid (D-NV), House Minority Leader Nancy Pelosi (D-CA) and Senate Minority Leader Mitch McConnell (R-KY) emerge from the White House to speak to the media on November 16, 2012 in Washington, DC. The Congressional leaders met with U.S. President Barack Obama to discuss deficit reduction and other economic issues. (Photo by Roger Wollenberg/Getty Images)

The fiscal deadline otherwise known as the fiscal cliff has been in place for a very long time. The Bush tax cuts were extended for two years back in 2010. The "supercommittee" failed to come up with a budget agreement over a year ago. And yet here we are, with Congress cramming into the night to try to kludge something together by this afternoon so it can go the House tomorrow, hours before the deadline.

According to the Washington Post:

"If all goes according to plan, the [Senate] leaders would roll out the legislation Sunday night and hold a vote by at least midday Monday, giving the House the rest of New Year's Eve to consider the measure."

"According to plan??" That's the plan?!?

This isn't just scarily dysfunctional government... it's freakin' embarrassing.

If Senators McConnell and Reid hammer out a budget deal that can pass their caucuses, Rep. Boehner is likely to take it up in the House. If it passes there -- and since it will include a tax increase, it will take D votes to get to 218 -- the president will presumably sign it before the ball drops in Times Square.

I can't imagine anyone will call that a success, but we will have avoided going over the fiscal cliff. But at what cost?

Much of that cost will be significantly reduced revenues in the deal. The Senate leaders are reported to be squabbling over the income tax threshold and the estate tax. If McConnell can get Reid to agree on a higher income tax threshold -- $400,000 (as opposed to $250,000) is back in the mix -- and more generous estate tax parameters, will such a deal get through D's in both Houses and the White House?

I don't know and I hope not but it could. Members and the White House may be so motivated to close a deal at this point that they'll take a lousy one. The Post reports that letting tax rates "lapse on income over $400,000 would raise about $600 billion over the next decade, according to White House estimates -- barely a third of the $1.6 trillion Obama initially hoped to extract from high-income households to help reduce record budget deficits." If the deal locks in the current estate tax parameters instead of the more progressive ones the White House wants, that loses another $100 billion.

On the other hand, the deal would income extended unemployment benefits, and going over means a "hard cut off" for millions of recipients -- they'll lose benefits on Jan 1. And these are the long-term unemployed, so they're already struggling. We could fix this retroactively, but they'd still get hurt.

Even so, it would be better to go over and quickly repair the damage on the other side. How do I know we'd get a better deal there? I don't, but at that point, I suspect Congress would quickly implement the president's back-up, bare minimum plan: cut the now-higher taxes on households below $250,000 (which after Dec. 31 scores as a big tax cut, so Rs can enthusiastically get behind it), extend UI, patch the AMT and doc fix, and maybe suspend the sequester. The estate tax will have reset to a much worse deal for those Rs and Ds who want to protect the top few tenths of a percent of wealthy estates ($1 million exemption, 55 percent rate), so they too would be motivated to accept the WH's deal ($3.5 million exemption, 45 percent top rate, as opposed to what we might get from the Senate deal: $5 million, 35 percent).

Those who hate that deal can start sharpening their knives for the debt ceiling fight, but that's another story... an even sadder one.

Months ago I and others argued that it would be better to go over than get jammed on a bad deal that squanders the leverage supporting a better, more progressive outcome. Stay tuned...

This post originally appeared at Jared Bernstein's On The Economy blog.