Sometime after Christmas and before New Year’s, Congress could pass legislation to keep tax rates where they are—in other words, to borrow a different cliché from across the pond, to kick the can down the road. The second possibility is for the Democratic-controlled Senate and White House to strike a deal with Boehner, who has suffered a “humiliating” defeat at the hands of his own party. Then it would likely have to move through a House-Senate conference committee. But the chances of this happening before the ball drops in Times Square on New Year’s Eve seem increasingly unlikely, [Potomac Research Group chief political strategist Greg] Valliere adds.
After hurtling over the cliff, he says, there is a chance for a “Plan C” in the new year involving restoration of the Bush tax rates for most Americans after they reverted temporarily to the Clinton-era rates. That would mean Congress would be voting for tax cuts and the Republicans who pledged never to raise taxes would remain true to their vow, technically. Perhaps, but he adds that would leave an “enormous number of moving parts, including the estate tax, capital gains, dividends, [alternative minimum tax] and the debt ceiling, a wide range of issues that have to be fixed fairly quickly.”
All those details can drag well into the winter, with a significant impact on economic growth and corporate earnings, stuff the financial markets care about, Valliere observes. What’s surprising is that the markets have been so optimistic that some solution would be reached before the year-end deadline.