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A Tax Refund That Could Help Congress Over Cliff

Author: Peter R. Orszag, Adjunct Senior Fellow
October 30, 2012


As the fiscal cliff, the federal spending cuts and tax increases scheduled to take effect in January, looms ever closer, an informal consensus along the Acela corridor is coalescing around a placeholder deal with details to be filled in over, say, nine months. The deal would come with some backstop enforcement mechanism in case those details never materialize. (Sound familiar?)

Such a prospect raises a vital question: During the nine or so months, what would happen to the tax cuts?

Let's focus on the scenario in which President Barack Obama is re-elected. The White House has insisted that it will not agree to extend the expiring tax cuts for those with incomes of more than $250,000. Yet House Republicans insist on universality, ruling out an extension that excludes those income classes.

If the White House were to agree, at Republicans' insistence, to temporarily extend all the tax cuts for the placeholder period, how many people would believe it was serious about ending the high-income tax cuts thereafter? This impasse is one reason I have been a bit skeptical that even a placeholder deal will come together before Dec. 31.

(Such a deal is more likely if the economy weakens, because then the administration would be more eager to avoid the uncertainty associated with delaying a deal into January. Or, if the House Republicans suffer a significant loss in the elections next week, it might cause them to reconsider their tax stance. Neither of these possibilities seems likely at this point, however. And if Obama wins the Electoral College vote but Mitt Romney, his Republican challenger, wins the popular vote -- so both sides feel they have a mandate -- or if legal disputes in some states make the election outcome uncertain for some period, it will only be more difficult to get a deal done before the end of the year.)

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