ANALYSIS

No instant ruin seen in ‘cliff’ fall

Government won’t freeze up Jan. 1 if budget stalemate holds

— If Washington fails to reach a tax and spending deal by Jan. 1, paychecks will shrink as income-tax rates rise. But defense contractors will keep working. Parks and monuments will remain open. Financial markets will either slump or not.

America’s fiscal condition will be altered without a deal between President Barack Obama and the Republicans in Congress. But not radically so, and in many cases not immediately.

This budget stalemate is unlike the many previous ones that threatened to cause a government shutdown. Agencies are not facing the immediate loss of authority to spend money. The danger of defaulting on the nation’s financial obligations is not at risk as it was during the 2011 impasse over raising the nation’s borrowing limit. And some of the tax and spending changes would not be felt for months.

The president and his Democratic allies are still deeply nervous about life on the other side of the fiscal deadline, and they continue to say they are eager to avoid that possibility. But Obama’s re-election victory and the few immediate implications from a breakdown in negotiations has emboldened them.

Democrats are betting that if Washington wakes up without a tax and spending deal on New Year’s Day, the country will heap blame on congressional Republicans. In recent polls, more people said that it would be the fault of Republicans if a deal could not be reached.

Democrats in the House will seek to make that point again this week by trying to force Republicans to vote on a bill to extend tax cuts for the middle class but not the highest earners.

“Tax cuts for the rich, which do not create jobs, just increase the deficit, heaping mountains of debt onto future generations,” Nancy Pelosi, the Democratic leader in the House, told reporters Friday. She added that the economy would benefit greatly if “we do not go over the cliff.”

But many Democrats also believe that failing to reach a deal for a brief period early next year would provide new leverage for Obama and a quick capitulation from Speaker John Boehner and his Republican colleagues on a package of tax cuts for the middle class and increased rates for the nation’s wealthiest citizens.

Obama pressed his case confidently Friday at a toy manufacturer in Pennsylvania. He warned that the Republicans’ refusal to reach an acceptable deal by the end of the year would be “sort of like the lump of coal you get for Christmas.”

And in a message to the millions of people subscribed to the White House e-mail list, David Plouffe, a senior adviser to Obama, urged supporters to keep the pressure on lawmakers and warned of the dire consequences if the negotiators were unable to find common ground.

“Unless Congress acts, 114 million middle-class American families are staring down a tax increase starting January 1,” Plouffe wrote in the e-mail.

In Washington at the end of last week, Republicans offered a defiant tone, scoffing at the president’s proposal for $1.6 trillion in tax increases on the highest earners combined with new stimulus spending and other Democratic priorities. On Saturday, Sen. Orrin Hatch of Utah denounced what he called “radical” and “unserious” proposals by the president that he said represented an utter lack of leadership.

“Some on the other side of the aisle are advocating a disastrous ‘Thelma & Louise’ strategy,” Hatch said in the weekly Republican radio address, referring to the movie heroines who drove their car off a cliff.

The ability of Republicans to maintain their position may depend on what actually happens if no deal is reached by the end of the year. Government officials, tax specialists and business representatives said they did not expect major implications right away.

Pentagon officials and military contractors said that billions of dollars in automatic spending reductions would be delayed for weeks, if not months, as they figured out where they needed to cut and by how much. Defense Department hiring would be stopped temporarily, officials said. But no one would be fired immediately, and no programs would end.

“While a hiring freeze is likely to be implemented quickly, it will take time to implement further budget cuts and the number and types of personnel to be furloughed,” said Lt. Col. Elizabeth Robbins,a spokesman for the Defense Department.

Large companies that do business with the Pentagon are likely to wait for guidance before cutting back weapons programs or laying off civilian workers.

Parks, libraries and monuments would remain open in the new year, unaffected by the lack of a deal in the way that a budget stalemate threatens immediate closure.

Many workers would see their first paychecks in January shrink as employers adjust for higher payroll taxes. And the Internal Revenue Service would race to reprogram computers, possibly forcing an eventual delay in refunds. But tax preparation for 2012 would march forward as usual toward Jan. 22, when the IRS is expected to begin processing electronic returns.

“There is this period in which Congress can continue to arm wrestle and wait for a settlement on this without affecting many people,” said Bob Meighan, a vice president of TurboTax, which makes tax preparation software.

At the IRS, the biggest concern is about the alternative minimum tax, which would eventually force higher tax payments from about 60 million Americans unless the president and Republicans agree to adjustments like the ones that have been made regularly since 1969.

“There would be serious repercussions for taxpayers,” Steven Miller, the acting commissioner of the IRS, wrote to lawmakers in November.

Front Section, Pages 6 on 12/02/2012

Upcoming Events