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With the fiscal cliff deadline just days away and House Speaker Boehner’s ‘Plan B’ disaster roiling markets, it doesn’t appear as if a deal is on hand.In fact at his press conference this morning, Boehner said called for an overhaul of the tax code but said, “how we get there? God only knows”.
In a new note titled ‘No Cliffmas Miracle’ Bank of America’s Ethan Harris and Michael Hanson say there are five reasons that we should be “cautious on the prospects of a quick or comprehensive resolution to the fiscal cliff this year”:
- It is easy to put down general numbers and much harder to come up with specific proposals. “On the spending side, gimmicky cuts like indexing entitlements to the chain CPI can only yield small spending cuts. On the revenue side, raising the top tax bracket (households with income over $400,000) increases 10-year revenues by less than $400 billion.”
- Raising the debt ceiling continues to be a ‘sticky issue’.
- The whole package will be “hard to swallow”. “We see a high risk that when the whole package is presented, warts and all, there could be serious defections from both sides. We would expect the President and Speaker to ask for a simple up or down vote on the whole package to avoid endless additional haggling. Faced with this stark choice, protest votes are likely, in our view.”
- There is very little time. “We continue to see an elevated probability (perhaps a one-in-three or one-in-four) that they cannot get a deal done by year end. The result would be either a temporary expiration of the whole cliff or a very short term extension.” The risk is that once the deadline has been set aside once, they could keep doing so until the stock market forces them to act.
- The myth that going over the fiscal cliff will be “relatively painless”.