Teetering On The Edge Of The Fiscal Cliff

As the year 2012 comes to a close, a so-called fiscal cliff has Americans anxious about what’s ahead for the New Year. It’s the result of a series of expiring tax cuts and looming spending cuts at the end of the year that could further drive the fragile economy deeper into recession.

Taxes could be boosted by more than $500 billion in 2013, and nearly 90 percent of Americans would be affected by higher taxes. The nonpartisan, nonprofit

Tax Policy Center

estimates that the fiscal cliff scenario could cause taxes to raise an average of $3,500 per household. In addition, tumbling over the fiscal cliff could also result in $200 billion in spending cuts.

University of Cincinnati faculty and administrators weigh in on what’s at stake:

Eric Rademacher, co-director, UC Institute for Policy Research

– “While there is intense focus on averting a crisis that has been simplified down to the term 'fiscal cliff,' in reality lawmakers in Washington are facing a complex set of issues and considerations.  As a result, it has been difficult for our representatives to communicate the varied implications of decisions being made about the federal budget and the implications should automatic spending cuts and tax increases kick in this January.  National polls show Americans still lack information about the impact the current negotiations might have on their lives and on the American economy. However, the partisan divide in our county did not end with the presidential election. As a result, opinions of Republicans and Democrats are often aligned with their elected representatives – making the issues surrounding the 'fiscal cliff' like many others in our country today.” 

David Brasington, associate professor of economics and Kautz Chair in Political Economy, Carl H. Lindner College of Business (LCOB)

– “The cliff was put in place at the end of the last round of contentious budget negotiations with the idea that the cliff would be so horrible, surely Washington would realize it would be in everyone's interests to reach an agreement rather than go off it. Lo and behold, campaigning took precedence over deal-making, and the cliff looms. What is needed is comprehensive reform of the tax code and entitlements.  We don't have time for that. So I would expect some piddling around the edges in the short term: letting some Bush tax cuts expire, keeping others for now and some pledge of modest slowing of spending. Probably tax hikes now, with the promise of spending cuts in the future that never materialize. And then we'll have to revisit the issue down the road when the budget shortfalls become critical again.”

William Ball, MD, vice president for research

– “If the ‘fiscal cliff’ isn’t resolved and budget sequestration occurs, it could certainly have a negative impact on research at the University of Cincinnati. Many of the federal agencies responsible for funding a large percentage of university research would be negatively impacted, which would trickle down to our important research programs. Using data from fiscal year 2011, we estimate that sequestration could cost the university nearly $17 million in research funding and student aid. Those are just estimates and we remain hopeful that common ground will be reached to avoid sequestration.” 

Stephanie Hunter McMahon, associate professor, College of Law

– “As a tax professor, I focus primarily on the tax side of the impending fiscal cliff. What has been negatively termed a fiscal cliff should be viewed as an opportunity to assess our existing fiscal policies critically to see if they are creating the results that policymakers promised. The evidence that we do have on our tax policies suggests that many of our most cherished myths regarding taxation are just that, myths. Moreover, although the cliff would impose tax increases of approximately $3,500 per household on average, in practice the potential tax increase will not be distributed evenly. There are hard calls that need to be made in choosing which tax benefits are best for the nation as a whole.

“Unfortunately, however, the nature of politics today means that an honest assessment is unlikely to occur and, instead, policies will be traded as a means of shoring up political support from important constituents without concern for the greater impact on the tax system or larger tax objectives. The lack of certainty that results from this political trading is likely to continue well into the future, as policymakers adopt temporary provisions or institute policies that do not provide sufficient government revenue to fund the nation’s spending. In either case, the fiscal cliff may be bridged for the short-term but is doubtful to be permanently eliminated.” 

Benjamin Passty, research assistant professor, The Economics Center, (LCOB)

– “The fiscal cliff involves reconciling the need for short-term economic growth bundled with medium-term sustainability in the spending program of the federal government. That spending program threatens everyday Americans through the interest rates that are paid on public and private debt, and the value of the U.S. dollar as it floats in international exchange markets. Unfortunately, we are caught in a tradeoff between the short- and long-term, which is made messier by adding a political dimension to an economic problem. It is also questionable whether today's administration and Congress have much ability to bind the president and Congress of 2018 to any spending program under current law.

“Any solution involves accepting some short-term pain, as withdrawal of government spending will reduce jobs. Raising taxes will also be painful to households who already feel like they are strapped financially. But the long-term prize is creating a convincing plan to address the future spending obligation of the federal government, which is wrapped around the medical costs of our most vulnerable and oldest citizens. If a convincing resolution is reached, we can expect low interest rates for the next decade, which will spur investment and long-term economic growth.”

Joel Wolfe, professor of political science, McMicken College of Arts and Sciences (A&S)

– “From the political perspective, the fiscal cliff issue is a test of whether President Obama's re-election will fulfill the democratic ideal that elections determine policy. His election signaled that the voters want to improve the prospects for economic growth and jobs. This requires stimulating the demand for goods and services, as well as maintaining social security and Medicare. Voters rejected the notion that debt reduction was the whole ballgame. Yet, the fiscal cliff makes clear that the debt issue remains front and center. The decisions shaping America’s economic growth model, whether it will be austerity or debt-reduction through growth, are now being determined. The result will be a measure of presidential leadership but, more importantly, the significance of elections in shaping public policy in our democracy. 

“The fiscal cliff is all about debt reduction, combining cuts in spending with tax increases. The mandated cuts and tax increases will induce a recession and stymie job creation. The neoliberal policies being implemented in Greece, Spain, Portugal, Britain, Italy and Ireland provide clear evidence that austerity alone does not work; it breeds only a need for more austerity. 

“The negotiations will look for compromise. What will be revealing is the balance of concessions made.” 

Patrick Miller, assistant professor of political science, A&S

– “Politically, Republicans find themselves in a much weaker position to deal with the fiscal cliff at the end of 2012 than they did when this bargain was struck. Though they will hold the house majority in the next Congress, that majority is a product of redistricting. Republican leaders are doubtless keenly aware that more Americans voted for Democrats in House elections than Republicans. A majority of voters just reelected the President, an outcome that few would have anticipated when the cliff was created. Just 35 percent of those voting in 2012 agreed with the Republican position that taxes should not increase for anyone, according to the network exit poll; 47 percent agreed with the president’s position of an increase for those making $250,000 or more, with 13 percent advocating an across-the-board increase. Thus, public opinion appears to back Obama. Indeed, 43 percent of Americans responded in a mid-November CNN survey that congressional Republicans would be more to blame if negotiations fail and taxes increase, 15% percent more than would blame the President.

“Republicans, then, are caught between a rock and a hard place and the impetus is very much on them to come to negotiations in good faith. Polling since 2009 has consistently shown that the public perceives the Republican Party as more unwilling to compromise than President Obama. The public appears ready to blame them should negotiations fail, and the Republicans cannot count on public support for their positions to force the president’s hand in negotiations. Indeed, if we “fall off” the cliff, Republicans will find themselves in an even more precarious position. With taxes increased and spending cut, Democrats could propose to cut taxes for those making below $250,000, forcing Republicans to vote against a tax cut for the middle class in the next Congress. It is in their interest to forge a compromise with Democrats before that happens as they would likely suffer more than Obama in public standing.  Republicans, however, must walk a fine political line between a broader public closer to the president’s position and their own primary voters who strongly disdain Obama and have been willing to defeat compromise-minded legislators in congressional primaries. Their time is running out to figure out how to walk that line.”