Phase Shift on Fiscal Cliff

Maybe it’s something that’s been added to the drinking water, but the signals coming out of the GOP over the last 48 hrs, make me still more optimistic that the fiscal cliff can be avoided. The key driver is the element of last year’s Budget Control Act that automates disaster (i.e. the cliff) without positive action on the part of Congress and the President. Specifically, the Bush tax cuts will go away (all of them) on January 1, 2013 without agreement. So the President can effectively do nothing and the House GOP automatically loses what they care about most. That’s a powerful driver.

The outlines of an agreement prior to January 1 look like this: the GOP agrees to a Bush tax sunset for the very rich, the President agrees to continue the Bush tax cuts for the middle class. Sequestration goes away in favor of targeted cuts to discretionary spending. Debt ceiling increase agreed to. And a commitment to do major tax reform in the new Congress with an effective enforcement mechanism.

It’s really that simple.

The long term challenge will be to get tax reform right, and to figure out real ways to bend the health care curve down, even with Obamacare.

That’s not simple.

Stay tuned….