As expected, all the money on Wall Street wasn’t enough to defeat the Democrats. But that’s yesterday’s news. Bankers already have a new political headache: the looming fight in Congress over the “fiscal cliff.” Will the financial-services sector use this opportunity to kiss and make up with Democrats? Or to enact revenge for yesterday’s election results?
There are plenty of reasons for Wall Street to throw its rhetorical and lobbying weight behind a recalcitrant Republican position. For starters, income tax rates on top earners is sure to become a talking point during the debate, an issue that impacts not a few bankers and is ripe for the kind of populist rhetoric recently heard from the White House and the likes of senator-elect Elizabeth Warren—rhetoric which helped drive the wedge in the first place.
But there’s also reason to expect a truce between Democrats and Wall Street, thanks to the potentially disastrous expansion of the alternative minimum tax base. Congress passed the AMT in 1969 to prevent the very wealthy from avoiding taxes altogether through deductions and loopholes. The thresholds for paying the AMT, however, were not tied to inflation, causing the number of households subject to the tax to expand every year. Congress regularly corrects this by approving, with routine bipartisan support, what you might call a patch. But in 2012, tied up by a raft of other disputes, they neglected to do so. Now, the Tax Policy Center projects that about 27 million new households will have to pay the AMT—an average of $3,700 more per tax bill—if Congress does not act by the end of this year.
The near-consensus among experts is that the stakes are much too high for Congress not to act, as abruptly wresting that much money from the economy could hamper the already fragile recovery. Republicans have implied that their preferred solution is a fight to extend all of the expiring Bush tax cuts, thereby buying time to rewrite the tax code, and Sen. Chuck Schumer compared this course of action with hostage-taking. Indeed, premising the passage of the uncontroversial AMT patch on a grand overhaul of tax policy would be reminiscent of the debt-ceiling debacle, when the GOP withheld support for a routine raising of the debt ceiling just to gain pet policy concessions. Given that disaster’s impact on global markets, Wall Street’s lobbyists have a vested interest in preventing a similar squabble over the AMT. But so does the left. As the Washington Post reports, heavily urban, Democratic-leaning states—which have a preponderance of upper-middle-class families who would be slammed by the tax—are among the most vulnerable.
On both the AMT and the fiscal cliff at large, the danger lies with the class of Wall Streeters who have said that the balance of power today differs not a whit from the balance of power on Monday—those bankers who intimate that because the Republicans have retained the House in this election, the situation is fundamentally the same as it was during the debt-ceiling debate last summer. Just as they discounted public disapproval of Republican obstructionism, they may discount any message Americans may have sent last night about the ruling party’s handling of economic matters. They won’t hesitate to encourage Republican spoilerism—in order to protect choice Bush tax cuts, say, or force debt reduction in ways painful to the welfare state—and there is plenty of reason to suspect that, particularly in the lame-duck session, the GOP will choose gridlock over a civil resolution.
But that depends on whether Republicans consider Tuesday’s results a repudiation of extreme conservatism. The very next day, John Boehner announced that, in the coming fiscal cliff negotiations, Republicans will be “willing to accept some additional revenue via tax reform.” Can the House speaker, whose party effectively neutered him during the debt-ceiling debate, make good on that statement, with all its caveats? (He has vowed to oppose higher tax rates, preferring instead a reconfigured tax code.) Impossible to know. But if Republicans do, miraculously, play ball with Democrats, then Wall Street may as well do the same—and that would likely end this bitter separation. The bed is still there, waiting for bankers and Democrats climb back into it.
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