Absent a compromise on taxes, many Democrats, notably Sen. Patty Murray, Wash., have said they would be willing to let the tax breaks expire and challenge Republicans to reject new legislation to cut rates for 98 percent of Americans. But going over the cliff has the potential for chaos, disrupting the 2012 tax filing season and exposing Democrats to criticism that they were willing to jeopardize the economy for political gain.
During the campaign, Romney said that if elected he would seek a year-long extension of current tax policy, including low rates adopted during the George W. Bush administration, to give his administration time to develop a plan to overhaul the tax code.
Obama has vowed to veto legislation that extends the Bush tax breaks for the wealthy, but administration officials declined to say whether that threat would stand in the face of a Romney victory. Politically, it would be a risky move for Democrats to tell Romney that he cannot have a year to negotiate a budget deal — especially headed into the 2014 election, when 20 Democrats from moderate to conservative states are up for reelection.
Extending those policies is likely to avert a recession, but it would put the nation on track for a fifth straight year of budget deficits hovering in the range of $1 trillion and invite another downgrade of the nation's credit rating. In this scenario, Romney would be forced to act quickly on a broader deficit-reduction plan.
"We'll be on our way to doing tax reform and entitlement reform and an overall budget deal in 2013. And it's got to be done by the August recess," said Ken Kies, a top Republican tax lobbyist. "For a new president, the magic window of opportunity doesn't stay open forever."
During the campaign, Romney pledged to balance the budget within eight years by dramatically slashing most government spending, including Medicaid and other safety-net programs for the poor. He also pledged to increase military budgets and to overhaul the tax code without raising additional revenue.
Instead, Romney's tax plan calls for a 20 percent reduction in rates for all taxpayers, financed by the elimination of tax breaks primarily for the wealthy — a proposal that independent budget analysts have called mathematically impossible. Romney has nonetheless insisted that his tax plan is essential to reviving the economy and creating jobs, the central mission of his first term.