The Cliff That Republicans Fear the Most

So the election is now over. We know at least 99% of who won and who lost. So does this mean we're all done with the political drama of 2012? Not quite. Let me explain.

First, we must flash back to August 2011. Remember the debt ceiling debacle? Because Republicans in Congress refused to a sensible solution, we got "The Supercommittee". And because "The Supercommittee" oh so predictably failed (see above), we got a "trigger" (of budget cuts and tax increases that no one wants to be implemented entirely) that is about to be set in January if an agreement is not reached in the next six weeks.

This is why we're seeing negotiations along with a rare dose of comity. How can this be? Well, there's this.

To keep the economy afloat, the White House cut the deals it felt it had to. Many, such as Obama’s agreement to extend all of the Bush tax cuts in 2010, were poorly received by Democrats. Now comes the payoff. The expiration of those cuts and the automatic reductions set to take effect at year’s end—the so-called fiscal cliff—mean that Obama and the Democrats can gain a huge source of new revenue by doing nothing at all. Republican priorities are the ones suddenly in peril. The combination of tax increases on the rich, higher capital-gains taxes, and sharp cuts in defense spending have congressional Republicans deeply worried. To mitigate these, they’ll have to bargain.

Despite their post-election tough talk, Republican leaders have dealt themselves a lousy hand. Obama can propose a “middle-class tax cut” for the 98 percent of American households earning less than $250,000 a year—while letting the Bush tax cuts expire for those earning more—and dare the Republicans to block it. If they do, everyone’s taxes will rise on Jan. 1. It’s true that going over the fiscal cliff, as some Democrats believe will happen, would set back the recovery and could eventually cause a recession. But Democratic leaders in Congress believe the public furor would be too intense for Republicans to withstand for long.

Going over the cliff would also weaken the Republicans’ greatest point of leverage: renewing their threat to default on the national debt. Right now, the Treasury expects to hit the debt ceiling in February. But if the cliff can’t be avoided, tax rates will rise and government coffers will swell, delaying the date of default—thus diminishing the Republicans’ advantage. Alice Rivlin, the founding director of the Office of Management and Budget and a senior fellow at the Brookings Institution, says that “as quickly as the IRS began changing the withholding schedule, the date would be pushed back.”

While everyone fears "The Fiscal Cliff", there's far more for Republicans to lose if it comes to pass in January. After all, it includes military spending cuts, tax increases that hit high-income brackets the hardest, and a whole lot of federal funding that would be stripped from their states. Basically, it's pure political poison. And Congressional Republicans are having deep regrets over this very "Fiscal Cliff" that they agreed to in August 2011.

So once again, President Obama and Harry Reid hold the upper hand. But this time, it's far more obvious. And this time, it's Republicans who fear what will happen if no deal is cut by the end of this year. And with Republicans now poised to lose some seats in both houses of Congress in January, do they really want to see what happens if our country is forced to jump "off the cliff"?