As Taxmageddon approaches, Romney and Obama prepare for war

The danger of falling off a “fiscal cliff” is real.

Mitt Romney
If elected, how soon would Romney lead an assault on taxes? Photograph: Getty Images

To understand US politics in the past couple of years, it is useful to have a working knowledge of the stormy relationship between Charles I and his parliaments. In 1628, John Eliot, leader of the British parliamentarians, extorted from Charles I the Petition of Right, making parliament the sole body that could legally levy taxes. Without taxes approved by parliament, Charles could not wage war. Today, without taxes
approved by Congress, Barack Obama cannot stimulate the somnolent economy.

In 2010, when the Democrats lost their majority in the House of Representatives, Obama lost his power to legislate without doing deals with his Republican rivals. Many of the Republicans in Congress have become rubber stamps, solemnly pledging to Tea Party members not to raise taxes under any circumstances. In practice, this has meant government by fudge and mudge, short-term fixes at the eleventh hour and kicking the can down the track. But mostly it has meant no government at all.

To get by, in the summer of 2011, Obama negotiated the raising of the government borrowing limit, so that the administration could collect money to pay for all the things Congress had already approved. The price for the deal was high: tax increases and deep public spending cuts that will automatically come into force if another deferment cannot be arranged by 31 December this year. There is more. On 1 January, the deep cuts to personal taxes that George W Bush introduced will lapse unless Obama can make a deal.

Cuts and bruises

This confluence of two unbreakable deadlines, vast automatic cuts in public spending and income taxes hiked across the board has led
to a good deal of fervid talk about 2012 ending with an economic Armageddon, or “Taxma­geddon”, that will tip the US back into recession. The danger of falling off a “fiscal cliff” is real. The Congressional Budget Office estimates that if no deals are done, the tax hikes and automatic cuts will cause the country’s gross domestic product to drop by 4 per cent and average households will pay a further $1,750 a year in tax. Could such a disaster be allowed to happen?

Nothing is going to be fixed before the election in November. The fiscal cliff, therefore, provides an ominous, Wagnerian backdrop to all the arguments about the economy between Obama and Mitt Romney. It suits both sides to be able to point to a reasonable way forward. It lets Obama portray himself as a moderate, willing to extend the Bush tax cuts that put a maximum of 30 per cent on income tax and 15 per cent on capital gains but only for those earning $250,000 or less. According to polling, reducing income taxes for almost everyone is popular, as is taxing the super-rich more. The threat of Armageddon, meanwhile, offers Romney a simple shtick: vote for me and the Bush tax cuts continue.

What about the automatic spending cuts? So far, the Republicans’ small government arguments are making all the running. It is their low-tax, low-borrowing, low-spending agenda that is the battleground on which the main political battles are fought. How successful they will be after November depends on how many Tea Party candidates win seats in the House and how determined they will be to impose their will on the rest of Congress. Would they want to launch straight into a rancorous battle over the budget?

It would depend on who is president. If Obama is re-elected, the number of Democrats in the House will be the key to whether the tax-raising logjam will be broken or whether the Republicans will be able to continue, from time to time, to bring matters to a dramatic halt. If Romney rides in on a wave of Tea Party Republicans, he will lead an assault on the deficit, on taxes, on business regulation, and all the other means by which conservatives believe governments paralyse a business economy. How soon would he act?

Romney, whose work as a venture capitalist has left him open to the accusation that he put people out of work and outsourced jobs, has listed a range of government programmes to cut, including repeal of universal health care and privatisation of the state railroad, Amtrak. Yet he would be in no rush to implement them. When asked recently about how deep he would cut in his first year, Romney responded, “If you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5 per cent. That is by definition throwing us into recession or depression. So I’m not going to do that, of course. I don’t want to have us go into a recession in order to balance the budget.”

So the fiscal diehards in Congress may not have it all their way, whoever is in the White House. Romney has said that he agrees with the fiscal continence plan laid out by Congressman Paul Ryan, who would find deep savings in Medicare, the state health system for pensioners, by issuing tax vouchers instead of providing a service. Romney would not want to find himself, like Obama, presiding over a sinking economy with no means to stimulate it.

Fiscal storm

The crowded timetable at the end of the year will ensure a perfect fiscal storm. Although the presidential election is on 6 November, the new president will not be inaugurated until 20 January 2013. So, even if Obama loses, he will have to preside over the fiscal cliff talks. And if he wins, he must wait until the new Congress to see, like Charles I, whether he has a House he can do business with.

We have seen this movie many times before. Urgent-looking, grey-haired men and women are interviewed on their way in and out of important meetings and they declare that no one can reach agreement, that the distance between the two sides is wider than ever, and that all is lost. That mantra is repeated for a few days until, just before the final deadline, with the negotiators up to their necks in water and with the roof slowly lowering itself upon them, with one bound the captives are free. Government spending can resume for a little longer. And the can is booted way down the track to mark where the next Armageddon talks will begin.