Saturday, May 25, 2024

At The Cliff

In a fast moving series of events, GOP House Speaker Boehner and President Obama have both moved off their initial positions in talks designed to reach a last-minute deal to avoid the damage from allowing the US economy to go over the fiscal cliff at the end of the year. The pace of events accelerated Tuesday. Obama and Boehner publicly challenged each other to make the additional concessions needed to finish the negotiations in time to pass the necessary legislation by the end of the month.
Boehner made the first move to break the standoff Friday by agreeing to increase tax rates on those earning more than a million dollars a year. He also offered to give up the threat of a confrontation over an increase in the federal debt-ceiling when the deficit hits the current $16.4 trillion debt limit early next year, in return for deep cuts in entitlement spending from Obama.
Obama responded on Monday by raising the minimum level of income on which he wants tax rates to be increased from $250,000 to $400,000 a year. He also reduced his demand from Republicans for new tax revenue over the next decade from $1.4 trillion to $1.2 trillion. That compared to Boehner’s latest offer of $1 trillion in new tax revenue.


Obama also accepted Boehner’s suggestion for changing the way inflation is measured to slow the increase in cost-of-living adjustments in most federal entitlement programs. That change would save the federal government about $225 billion over the next decade.


Obama also dropped his request to extend the 2% cut in Social Security withholding payroll deductions which was initiated as a temporary stimulus measure at the end of 2011.


However, Obama and Boehner have still not reached agreement on how to handle the raising of the debt ceiling and extending long term unemployment benefits. Obama has not yet accepted a Republican proposal to increase the Medicare eligibility age from 65 to 67, and Republicans are still not willing to provide an additional $50 billion that Obama wants to finance new infrastructure projects.


On Tuesday morning, Boehner announced at a press conference that he would put elements of the current Republican plan to prevent tax rates from rising on January 1 to a vote by the House later this week, as a “Plan B” if his talks with Obama failed to reach agreement on a compromise before the end of the year, in time to avoid the fiscal cliff.


The White House dismissed Boehner’s proposed “Plan B” as impractical, because it would never pass the Democrat-controlled Senate.


The two sides also differ on how to calculate the total dollar value of the plan that Obama is proposing, with Republicans saying that some of the savings claimed by the White House consists of clever bookkeeping tricks rather than actual spending cuts.




While both sides are still concentrating on the remaining differences it is undeniable that the Obama-Boehner negotiations have succeeded in significantly closing the gap between them. In many cases, the disagreements over basic principles, such as whether to raise tax rates, or change the formula for entitlement inflation adjustments, have been resolved, reducing the remaining talks to resolving disagreements over the size of the tax increases and spending cuts proposed by each side.


Boehner’s agreement to raise tax rates for upper income earners, even at the millionaire level, risks triggering an open revolt against his leadership by fiscal conservatives and Tea Party activists who represent much of the Republican majority in the House. Many would have also preferred that Boehner had held firm on the basic Republican position that any tax rate hikes would threaten job creation and the current fragile economic recovery.


Obama will also get some flak from liberal Democrats and the senior citizens lobby for agreeing to the Republican proposal to reduce cost-of-living adjustments for entitlement programs. He has also disappointed some Democrats by compromising on his demand, dating back to the 2008 presidential campaign, raising the tax rates on the top 2 income brackets effecting everyone earning more than $250,000 a year. By offering to raise the income floor for the tax hike to $400,000, Obama would be limiting the rate hike to only the topmost income tax bracket. That tax rate would increase from 35 percent, where it is now, to 39.6 percent, where it was before the Bush era tax cuts.




Obama’s concessions in these negotiations have been largely tactical, but by agreeing to increase tax rates, Boehner has compromised on a core Republican principle.


For decades, Republicans have contended that this country’s fiscal problems are due to out-of-control federal spending rather than inadequate tax revenues, and that the only way to restore American prosperity is by reducing the percentage of the country’s wealth consumed by taxes rather than further increasing it.


The conservative Republican plan for eliminating the federal deficit has consisted of a combination of a comprehensive federal tax code reform to eliminate special interest deductions, thus broadening the tax base, reducing the tax rates to generate more economic activity, thereby increasing the total amount of tax revenue generated, and reforms to entitlement program spending, specifically Medicare, Medicaid and Social Security, whose rapid increases in costs have been the primary factors increasing budget deficits on both the state and federal levels.


Republicans have long argued that as long as the increase in entitlement spending remains out of control, no amount of tax increases will succeed in reducing the deficit. Eventually, if left uncontrolled, the rising cost of those entitlement programs, which Obama and the Democrats have refused to significantly modify, will drive out all other forms of government. That is why Boehner, in his earlier negotiations with Obama over ways to avoid the fiscal cliff at the end of this year, has insisted that the president identify serious cost savings in those entitlement programs in return for Republican concessions on generating more tax revenues from any source.




The fiscal cliff is the Washington nickname given to a drastic series of tax increases and federal budget cuts to domestic and military spending programs due to go into effect at the end of this month. These include the expiration of the Bush-era tax cuts for those in all income brackets, a sharp increase in the tax rate on capital gains and dividend income, a sharp rise in the federal inheritance tax, and an end to extended unemployment benefits. The total impact of all these tax increases and federal spending cuts would take an estimated $600 billion out of the US economy, and according to many economists, slow its growth so much as to plunge the country into another recession.


Business leaders say that worries about the impact of the fiscal cliff on their companies are already having a detrimental impact on the economy. They have delayed business investments and new hiring, slowing the rate of economic growth even before the end of this year.


Obama would also like to include in the same deal a permanent fix for an expensive flaw in the Alternative Minimum Tax (AMT), and the cancellation of an unpopular Medicare provision which calls for progressively deeper cuts to covered doctor payments.


The AMT was first passed in 1969 to limit tax deductions so that the rich pay at least some share of their income from all sources in taxes. But because its minimum income limit was never indexed for inflation, the AMT, as originally defined, now impacts tens of millions of middle class taxpayers, and would raise their taxes unless Congress acts each year to pass a temporary “patch” to the law, as it has done every year for the past two decades. Similarly, Congress must pass a so-called “doc fix” measure each year to maintain current payment rates for Medicaid to doctors, ignoring legislation passed in 1997 that would cut their payments by 27% in 2013.




These nagging problems from obsolete legislation are some of the reasons why Republicans are demanding a comprehensive reform of the federal tax code. In addition to permanently resolving these recurring issues, an effective reform would eliminate the many unfair tax breaks which have been inserted into the code over the years to benefit politically well-connected interest groups.


Republicans believe that by broadening the tax base and simplifying tax laws to make the system more equitable, overall tax rates can be reduced, without impacting net tax revenues, stimulating further economic growth. But Obama and the Democrats have long resisted Republican efforts to enact comprehensive tax reform, while pressuring for increasingly higher tax rates on the wealthy.




Boehner was always willing to consider was a version of Mitt Romney’s idea to set a cap on all income tax itemized deductions which would increase the total amount of tax paid by higher income individuals without raising their tax bracket rates. That would raise $830 billion in new tax revenue over the next decade.


Obama was originally insisting on those increases plus a tax rate raise on the two highest income brackets that would raise another $800 billion over ten years from the wealthiest 2 percent of American taxpayers.


Democrats had claimed that allowing the Bush-era tax breaks for the top two tax brackets to expire would merely bring them back to their level during the Clinton years. However, that does not count a new 3% surtax on investment income and other tax increases already scheduled to go into effect next year as part of the Obamacare legislation. In addition, top income tax rates are above 8% in many states, such as California, New York, New Jersey, Oregon, Hawaii, Iowa, Maine Rhode Island and Vermont. That would bring the total effective tax rate for high income earners in those states to well over 50% if the tax increase Obama has asked for goes into effect.




Boehner’s Friday counter-offer would accept the top tax rate increase from 35 to 39.6%, but only for those earning more than $1 million a year, and would affect about 400,000 families next year, far fewer than Obama’s initial proposal.


The Boehner tax rate increase would generate $460 billion in new tax revenues over the next decade. It would also undermine the unified Republican position against all tax increases, and likely produce a severe split within the party between fiscal conservatives and moderates.


Many Republicans believe that this has been Obama’s true agenda in these negotiations all along. They think that Obama has no intentions of reducing the federal deficit at all, and to prove it, they point out that his latest proposal would use 75% of his proposed $1.6 trillion in new tax revenues for new government spending. Obama’s plan seeks more than $250 billion in spending on new government programs, including a $50 billion fund for new infrastructure projects and expanded federal spending on education.




His conservative critics also believe that Obama has been pressing for Republicans to agree to raise the top tax rate to give him political cover for further tax increases to pay for even more federal spending during his second term, rather than any significant deficit reductions. Since Obama has taken office, he has increased share of federal government taxes of the US economy to 25% from the historical norm of about 20% since the end of World War II, and Obama has tried to make the temporary increase in spending levels passed by Congress in the 2009 stimulus package permanent. In addition, Obama is planning to seek a dramatic increase in the federal taxes on carbon-based energy use for both consumers and industry during his second term, in the name of attempting to slow the rate of global warming.




The differences between Obama and Republicans on these issues grow out of their contrasting views of the role of government in the economy. As became apparent from a statement he made during the presidential campaign, Obama believes that this country’s prosperity stems primarily from government investment, rather than the productivity of the free market economy. He believes that the government can spend the tax dollars it collects from citizens far more productively than they would spend it themselves.


The Republicans contend that every dollar removed by taxes from the private economy reduces the amount of capital available for investment by American companies and entrepreneurs to generate jobs, create new products and expand markets yielding fiscal prosperity for all, including the government, which benefit from increased tax revenues generated by the overall growth in business activity.


The Republicans also point to the slow growth of Europe’s welfare states as the direction in which Obama’s big government spending programs would steer the country. They also warn that continuing to run large federal deficits, over the long term, would lead the US to the brink of bankruptcy, and the severe fiscal problems now facing countries like Greece, Italy and Spain, whose stagnant economies can no longer support their huge debt loads.




In return for his concessions on tax rates and itemized deductions, generating about $1 trillion in new tax revenues over the next decade, Boehner is demanding that Obama cut $1 trillion in federal budget spending. That is generally in line with basic Republican position that any federal tax revenues increases be matched dollar for dollar with spending cuts, both contributing to the main goal of reducing the chronic federal budget deficit.


“Our position has not changed,” Boehner spokesman Michael Steel said Sunday. “Any debt limit increase would require cuts and reforms of a greater amount.”


Another new concession offered by Boehner would be to put off another bruising debate over raising the debt limit for a year while Obama wants to table the debt-limit issue for at least two years.


The White House’s public reaction was to reject Boehner’s millionaire tax rate concession as inadequate. The White House said it would raise too little additional tax revenue to significantly reduce the record budget deficits called for by Obama’s spending proposals.


On one level, Boehner’s offer meant that Obama had achieved his political goal of breaking the back of Republican resistance to increasing tax rates, but it also put the onus on Obama to respond with similar concessions, or risk losing the political high ground in the debate. That was what forced Obama to make his counteroffer Monday, limiting the tax increase only to those earning more than $400,000.




Boehner’s offer to limit the tax rate increase to those making $1 million or more mimics the position of many elected Democrats from high cost of living areas such as New York and Los Angeles who have long complained that Obama’s proposal to raise tax rates on all families making more than $250,000 would impact many middle class families in those areas. A number of Democrats have openly advocated the equivalent of Boehner’s proposal, which would reserve tax rate increases to those earning more than $1 million annually.


Boehner’s proposal also undermines the Democrat class warfare rhetoric which claimed that the primary objective of Republicans was to protect “millionaires and billionaires.” It also is likely to be seen by many voters as an effective response to Obama’s demands for more “fairness” and “balance” in any deal to reduce the deficit and avoid the fiscal cliff.


While Boehner is clearly risking a revolt against his leadership in the GOP ranks, he has certainly put Obama and the White House on the defensive as the time available pass legislation before the end of the year quickly runs out. While the economy would begin going over the fiscal cliff on January 1, members of Congress will want to adjourn at least a week earlier in order to go home to spend the holidays with members of their families.




Recognizing the time constraints, Boehner has proposed a two stage process, which envisions quick enactment of a small scale deficit reduction plan, incorporating the points to which both sides have already agreed, while setting hard deficit reduction targets for more complex legislation to be enacted by the new Congress when it returns in Washington next year which would include more comprehensive reforms of the federal tax code, which eliminate or cut back the major special interest tax breaks, in addition to effective long term measures to reduce the rate of increase in spending for federal entitlement programs. In addition, by agreeing to put off another debate on raising the debt limit for a year, Boehner’s proposal would take some of the pressure off the new Congress to address other measures first.


All told, Boehner’s proposal would generate about $2 trillion in savings over the next decade, split equally between new taxes and spending cuts, including the $460 billion generated by letting the Bush-era tax cuts expire on incomes over $1 million a year.


Obama also was forced to respond by Boehner’s complaint that he was not offering enough spending cuts, and forced him to offer additional spending cuts in his Monday proposal, although still not enough to satisfy the Republicans.


While the broad outlines of the tax and spending deal seemed to be emerging after the negotiating session Monday, the devil, as the saying goes, is in the details. The two sides still have to work out their differences on federal taxes on inherited wealth, as well as the tax treatment of capital gains and corporate dividends, whose current provisions are also about to expire.


Many in Washington believe that Boehner’s offer to set the minimum income limit on tax increases at $1 million was just an opening bid. Eventually, if a fiscal cliff deal is reached, the new, higher upper income tax bracket will probably start somewhere in between Obama’s $400,000 income limit offer Monday and Boehner’s millionaire’s tax hike.




Democrats complain that Boehner’s proposal is still too heavy on budget cuts and too light on new tax revenues, but they can no longer complain that Republicans are not willing to negotiate in good faith. Indeed, now that shoe is on the other foot.


Boehner has taken a significant personal risk by being willing to blink first in his standoff with Obama. A number of Republican Party leaders warn that he may be jeopardizing his party leadership post by abandoning the GOP no new tax stance.


Current indications are that Boehner will probably get the quiet support of other congressional Republicans on a fiscal cliff deal now, because they more concerned about the damage that would be done to national security if the deep cuts that in the Pentagon budget that were part of the cliff’s provisions had to be carried out. But Boehner may pay a price for it later in the form of a serious conservative challenge to his position as Speaker in the new Congress starting in January.




As a practical matter, Obama and Boehner must agree to a deal within a week if the necessary legislation is to be passed and signed into law before the country goes over the fiscal cliff at the end of the year.


Boehner has already put the onus for the delay on Obama for “slow walking” his responses to previous Republican offers to resolve the crisis, and he gets some credit on that score for being willing to break the weeks of stalemate and partisan posturing by making the first move.


With anticipation now growing for success in reaching a last minute fiscal cliff deal, it is important to remember that this outcome is still not certain, as we saw from the Obama-Boehner debt-limit negotiations in 2011. A long-term grand bargain between the two on taxes and spending seemed to be within reach, when the president decided to back away by throwing in a deal breaking new tax demand at the last minute. It is also possible that Boehner could face an open rebellion in House GOP ranks even before the crucial vote to approve the fiscal cliff is taken before the end of this year.


If there is one thing that we have learned from the previous negotiating history between the two sides, it is not to be surprised by a last minute surprise.


The Washington Post contributed to this story.



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