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Obama Administration Could Freeze Tax Withholding at 2012 Levels to Blunt Fiscal Slope Impact in Early 2013

The lame duck session will, at best, provide a temporary fix for the fiscal slope, according to House Speaker John Boehner. He expressed a philosophical opposition to a lame duck session passing major legislation – “lame duck Congresses aren’t known for doing big things and probably shouldn’t do big things” – that probably looms larger than anything. So the best-case scenario is some kind of stopgap that kicks things into next year, from the perspective of avoiding the slope.

But Democrats have a strategic interest in going over the slope and starting negotiations from a different point of leverage. Notably, when pressed, Boehner only waved at “some kind [of] temporary push back of the sequester,” saying nothing about the Bush-era tax cuts. Democrats could allow them to expire and then come back with a tax-cut package that changes the dynamic for Republicans, who would not vote for a tax increase.

What of the impact to the larger economy if all the tax rates expire? That includes a patch to the alternative minimum tax so it doesn’t hit families at the upper edge of the middle class.

The thing is, Congress doesn’t get much say in how taxes get administered after they set the rates. So the executive branch could maneuver quite a bit to minimize the fiscal impact of the tax rates, just as they could on the sequester.

The Obama administration could blunt the economic harm caused by the “fiscal cliff” at the end of the year by using its unilateral powers over spending and taxes, for instance, by freezing how much in taxes is taken out of payroll checks, according to former senior officials and other tax and budget experts […]

In 2010, when taxpayers were about to see a similar automatic increase in income taxes, top advisers to Treasury Secretary Timothy F. Geithner privately concluded that he probably had the power to put off changes to the tables under some circumstances, according to sources who spoke on the condition of anonymity to discuss the previously unreported deliberations.

If the administration were to take such emergency actions this time around, it could buy the White House and Congress more time to reach a deal, easing some of the urgency to preempt the fiscal cliff. Economists have warned that the combined effect of increased taxes and slashed spending could plunge the nation into recession.

It’s not a permanent solution. But the country could roll into January having fallen “off the cliff” but with virtually no macroeconomic impact. Just as tax withholding could be delayed, OMB Watch explained that the near-term impact of the sequester could be blunted by delaying new contracts, pulling up money already appropriated for future years, and other actions. You can even extend the time frame for the debt limit out a couple months.

This should completely change the approach to the fiscal slope. If Democrats feel like they have a better negotiating position in a new Congress with Bush-era tax rates restored, there’s no economic reason for them to avoid that circumstance.

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David Dayen

David Dayen