After weeks of fiscal cliff posturing from both sides, the outlines of a deal between President Obama and House Speaker John Boehner are rapidly taking shape. Most chief executive officers would welcome any agreement to avoid the budget sequester and the strong blow to the economy that would accompany it. A deal would, furthermore, reassure most business leaders (and ratings agencies) that Washington isn’t hopelessly broken.
But there are at least three reasons that business should be concerned about the deal that appears to be shaping up.
First, it appears there will be no further extension of the payroll tax cut, which will reduce demand and cause a serious drag on the economy. As Zachary Goldfarb of the Washington Post pointed out, allowing the tax cut to expire would have the same effect as letting the full sequestration kick in.
Second, Obama has apparently withdrawn his refusal to negotiate over the debt ceiling. His latest offer includes a two-year extension. That’s enough to get past the 2014 midterm elections. But it won’t eliminate the threat of default from wrecking the economy in the future. Given the severe effect on consumer confidence wrought by last year’s near-miss on default, that’s something any CEO should worry about.
Finally, the emerging deal will raise taxes on a segment of the population—likely households with income between $400,000 (Obama’s offer) and $1 million (Boehner’s offer). There’s probably no way this could have been avoided. But the Congressional Budget Office has estimated that returning to Clinton-era tax rates for households making more than $250,000 a year would cut a tenth of a percentage point from economic growth next year, costing 200,000 jobs.