White House holds “fiscal cliff” talks with Congressional leaders this week
President Barack Obama will be meeting with Congressional leaders at the White House this week to discuss a bipartisan deal to avert the “fiscal cliff” or the combination of tax increases and $1.2 trillion in across-the-board “sequester” cuts set to take effect in January.
“I’m open to compromise. I’m open to new ideas. I’m committed to solving our fiscal challenges,” Obama said at his first post-re-election press conference last Friday.
By law, the lame duck Congress will have until Dec. 31st to reach a $1.2 trillion deficit reduction deal; otherwise, sequestration will be triggered on Jan. 1, 2013 and impose steep cuts to both defense and non-defense discretionary spending as mandated by the Budget Control Act of 2011.
In addition, lawmakers will have to decide whether or not to extend all of the tax cuts that are set to expire at the end of the year. The expiring tax cuts include the Bush-era tax cuts, the payroll tax cut, and indexing the Alternative Minimum Tax (AMT) for inflation. Also on the agenda are the emergency unemployment benefits and Medicare physician reimbursement (known as “Doc Fix”), both of which will expire on Dec. 31.
The CBO projected that the Gross Domestic Product (GDP), which measures the total value of all goods and services produced in a country, will shrink by 0.5% and unemployment rate will rise to 9.1% in 2013 if both the Bush-era tax cuts expire and the sequester cuts take effect.
However, the CBO also cautioned that extending the tax cuts and halting the sequester cuts indefinitely would add to the national debt and risk triggering a “fiscal crisis” worse than the current fiscal cliff.
Both the President and Republican House Speaker John Boehner held press briefings after the election last week to emphasize the need for bipartisan cooperation in dealing with the fiscal cliff. But based on their initial posturing, the path to avert the fiscal cliff might not be easy.
Here are the key points where the President and Boehner appear to diverge:
On whether the lame duck Congress should pass a comprehensive deficit reduction package by Dec. 31, 2012 or simply approve a temporary measure to avert the fiscal cliff and postpone the deficit reduction deal until next year:
Boehner is in favor of passing a temporary measure during the lame duck secession and postponing the deficit reduction negotiations until next year.
“We won’t solve the problem of our fiscal imbalance overnight and certainly won’t do it in a lame- duck session of Congress. And it won’t be solved simply by raising taxes or taking a plunge off the fiscal cliff,” said Boehner. “For this to work, we need to plan for a serious process, focused on substance, not on theatrics. It will require weeks of work.”
Waiting until next January will give Republicans more political leverage on deficit negotiations since Congress will have to authorize the raising of the debt ceiling and funding to avoid a government shutdown early next year.
However, President Obama has stated that he will only accept a comprehensive deficit reduction package to avert the fiscal cliff.
“If Congress fails to come to an agreement on an overall deficit reduction package by the end of the year, everybody’s taxes will automatically go up on Jan. 1st. Everybody’s – including the 98% of Americans who make less than $250,000 a year,” said Obama. “And that makes no sense. It would be bad for the economy and would hit families that are already struggling to make ends meet.”
Democratic Senate Majority Leader Harry Reid pointed out that Congress has held numerous hearings on deficit reduction and even convened the Super Committee to tackle the deficit during the past two years. Reid said the deficit reduction package should be passed during the lame duck session.
“I don’t know how they think they benefit by waiting until sequestration kicks in,” said Reid. “I’m not for kicking the can down the road. I think we’ve done that far too much. I think we know what the issue is – we need to solve the issue. Waiting a month, 6 weeks, 6 months. That’s not going to solve the problem. We know what needs to be done. So I think that we should just roll up our sleeves and get it done.”
On whether to extend the Bush-era tax cuts for the wealthy
President Obama has urged House Republicans to extend the Bush-era tax cuts for middle-class Americans or individuals earning less than $250,000 a year. The Senate passed the Middle-Class Tax Cut Act (S.3412) with a 51 to 48 vote in July. The Senate bill failed in the House by 181 to 246 vote. At the time, House Republicans insisted that the Bush-era tax cuts should be extended to everyone, including individuals making more than $250,000 a year.
“While there may be disagreements in Congress over whether or not to raise taxes on folks making over $250,000 a year, nobody – not Republicans, not Democrats – want taxes to go up for folks making under $250,000 a year. So let’s not wait,” said Obama. “Even as we’re negotiating a broader deficit reduction package, let’s extend the middle-class tax cuts right now…That one step – that one step would give millions of families – 98% of Americans and 97% of small businesses – the certainty that they need going into the new year. It would immediately take a huge chunk of the economic uncertainty off the table, and that would lead to new jobs and faster growth.”
Obama added, “And I’ve got the pen ready to sign the bill right away. I’m ready to do it. I’m ready to do it.”
Boehner has opposed allowing the Bush-era tax cuts to expire for the wealthy, citing an Ernst & Young report that “raising the top rates would destroy nearly 700,000 jobs.”
The Ernst & Young report concluded that “employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs” over a 10-year period if the top 2 marginal tax rates and capital gains tax rates revert back to their pre-2001 levels. The Ernst & Young report was commissioned by the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce – all organizations that have opposed President Obama’s tax plan.
However, the CBO’s analysis found that allowing the Bush-era tax cuts to expire for individuals earning more than $250,000 a year would result in about 200,000 fewer jobs being created.
On increasing tax revenues & “balanced” approach to deficit reduction
President Obama has indicated that he is open to entitlement reforms, particularly lowering the overall costs of health care to make Medicare and Medicaid more sustainable. However, the President emphasized that he would not be accept a deficit deal that “isn’t balanced” and doesn’t include raising tax revenues.
“We can’t just cut our way to prosperity. If we’re serious about reducing the deficit, we have to combine spending cuts with revenue, and that means asking the wealthiest Americans to pay a little more in taxes,” said Obama. “I’m not going to ask students and seniors and middle-class families to pay down the entire deficit while people, like me, making over $250,000 aren’t asked to pay a dime more in taxes. I’m not going to do that.”
While Boehner has stated that Republicans are “willing to accept some additional revenues via tax reforms,” his comments indicated that the GOP won’t accept increases in tax rates for the top income brackets.
The additional tax revenues, Boehner said, would have to come from closing “special interest loopholes and deductions”, which would subject more income to taxes. However, some of those “special interest” deductions could include tax preferences popular with middle-class families such as the mortgage interest deduction and child tax credit.
“It’s clear that there’s lots of special interest loopholes in the tax code – both corporate and personal. It’s also clear that there are all kinds of deductions – some of which makes sense, others don’t. And by lowering rates and cleaning up the tax code, we know we’re going to get more economic growth. It will bring jobs back to America. It will bring more revenue,” explained Boehner. “We also know if we clean up the code and make it simpler, the tax code will be more efficient. The current code only collects about 85% of what’s due to the government. And it’s clear if you have a simpler, cleaner, and fairer tax code, that effectiveness and efficiency in the tax code increases exponentially.”
- Congressional Budget Office: Economic effects of policies contributing to fiscal tightening in 2013 – November 2012 (PDF)
- Ernst & Young: Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013 – July 2012 (PDF)
- WhatTheFolly.com: Transcript: Republican House Speaker John Boehner’s press briefing on the fiscal cliff on Nov. 9, 2012
- WhatTheFolly.com: President Obama: Everybody’s taxes will increase if Congress fails to pass deficit reduction package by Dec. 31
- WhatTheFolly.com: Transcript: Senate Majority Leader Harry Reid’s post-election press briefing
- WhatTheFolly.com: Transcript: House Majority Leader John Boehner’s post-election press briefing
- WhatTheFolly.com: Obama wins re-election, renews call for bipartisanship to solve nation’s debt problem
- WhatTheFolly.com: CBO analysis shows ‘fiscal cliff’ will sharply reduce long-term deficits but lead to a recession in 2013
- WhatTheFolly.com: Senate Democrats pass middle-class tax cut
- WhatTheFolly.com: House GOP rejects Senate tax cut extension bill
- WhatTheFolly.com: CBO warns of approaching ‘fiscal cliff’
- WhatTheFolly.com: Analysis: Romney’s tax plan would shift tax burden to middle and lower-income Americans