How a Delay in the Debt Limit Will Change America’s Fiscal Politics

By :: May 24th, 2012

By now, you know the great taxmageddon story: At the end of the year, a lame duck Congress and a new or newly re-elected president will face the confluence of three extraordinary challenges—the 2001/2003/2010 tax cuts expire, the automatic spending cuts adopted in 2010 begin to bite, and the Treasury loses its ability to borrow new money.

But what if that schedule is wrong? What if that third forcing issue—hitting the statutory debt limit—does not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck.

Here’s what might happen:

Assume President Obama is re-elected. Separating the debt limit from those other fiscal issues strengthens his hand enormously in 2012.

It makes it much easier for him to push Congress to extend the 2001/2003 tax cuts for all but those making $200,000 or more. Without the threat of a government shutdown, congressional Republicans lose their strongest leverage. And they’d have to explain why they forced a tax increase for nearly all Americans in order to preserve tax cuts for a handful of the wealthiest. Worse, they’d look like petulant losers.

The GOP hand will be weakened even more by the Congressional Budget Office’s new estimate that falling off the fiscal cliff would likely throw the nation back into recession.  

Obama could, in that environment, come off as the voice of reason—the role he loves to play more than any other. He could sweeten the pot by offering a deal to delay the automatic spending cuts (which almost no-one supports) and set a date in 2013 by which Congress would enact tax reform and, perhaps, additional spending reductions. He’d try to work a debt limit extension into the mix too. But worse case, he could put it off until say, March of 2013.

The more interesting speculation, however, is about what happens if Mitt Romney is elected President. If he wins in November, there will be no living human in America more anxious to have the debt limit resolved in 2012 than Romney. He would, I suspect, give up almost anything to avoid having to face the debt limit shortly after he is sworn in. I can hardly think of a less auspicious start to his presidency than a knock-down drag-out brawl over increasing government borrowing.

Just think about it. If he asks for a debt limit increase as one of his first acts in office, already-skeptical tea partiers would abandon him in droves. If he didn’t, and allowed the nation’s borrowing authority to expire….Well, no self-respecting ex-Wall Street guy is going to do that.

As a result, a newly-elected Romney would put enormous pressure on congressional Republicans to make the debt limit issue go away. In 2012. That would mean convincing the lame duck Congress to quietly pass a one or two year increase.

Just defeated Democrats, who have spent the past year ripping Republicans for irresponsibly holding the debt limit hostage would, of course, switch roles and hold the debt limit hostage. Their price for dealing: Tax increases. Big. Fat. In-your-face-Grover-Norquist tax increases.

So watch what happens to that debt limit deadline. It could change everything.

6Comments

  1. Michael Bindner  ::  3:38 pm on May 24th, 2012:

    Tax increases are automatic and will occur before Romney is sworn in, especially if the Democrats retain the Senate or take the House, which removes unilateral tax cut extensions under Reconciliation from the mix. That prospect makes compromise very possible once primary season is over and the Tea Party can no longer threaten any incumbent member with a challenge from the right. The prospect that the Republicans won’t run the table means that getting some kind of compromise on tax policy must come before the election. The GOP faces the classic existential confict between admitting their is a possibility that they will lose in November (something authoritarians hate to admit) and putting their donors at risk of a major tax increase (the wealthy have far more to lose from the expiration of the 2001/2003/2010 tax cuts than the lowest quintile (which stands to lose $10 a week according to TPC). I predict the donors will win the debate. The fact that the Speaker is saying he will default the debt is a sign he is about to cave. He always talks tough before compromising.

  2. Michael Bindner  ::  3:43 pm on May 24th, 2012:

    One reason that the debt limit won’t be breached so fast is that many people are likely cashing out their capital gains before rates go up, either automatically or due to compromise. That increased revenue should be good for a few months of lower borrowing.

  3. The “You’re Working too Hard” Daily Quinn « The Daily Quinn  ::  2:04 pm on June 5th, 2012:

    […] on how the next debt limit fight might change the politics of the […]

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    […] two interesting blog posts by one of my favorite tax policy bloggers, Howard Gleckman. In his most recent post, Mr. Gleckman discusses how, regardless of the outcome of the presidential election, tax increases […]

  5. Power Ranch real estate  ::  6:29 pm on September 25th, 2012:

    As a result, a newly-elected Romney would put enormous pressure on congressional Republicans to make the debt limit issue go away. In 2012. That would mean convincing the lame duck Congress to quietly pass a one or two year increase.

  6. Debt Ceiling, Taxmageddon, and Tax Reform  ::  9:02 pm on November 24th, 2013:

    […] two interesting blog posts by one of my favorite tax policy bloggers, Howard Gleckman. In his most recent post, Mr. Gleckman discusses how, regardless of the outcome of the presidential election, tax increases […]