Trail to Dodge 'Fiscal Cliff' Already Blazed
President Barack Obama was to meet today with congressional leaders to begin in earnest negotiations on a bipartisan agreement that would stop the federal government from plunging Jan. 1 over the "fiscal cliff," a combination of automatic tax increases for 90 percent of Americans and automatic cuts in government spending.
If lawmakers fail to strike some sort of "grand bargain," almost every tax reduction enacted since 2001 will expire, the nonpartisan Tax Policy Center warns, raising tax rates, reducing deductions and credits and "throwing millions of taxpayers onto the Alternative Minimum Tax."
More than 10 times as many estates would be hit by the inheritance tax, according to TPC, a joint venture of the Urban Institute and the Brookings Institution. The 2 percent payroll tax break would lapse, raising tax withholding on more than 120 million working households.
All told, federal taxes would jump 21 percent, or $536 billion, in 2013, TPC estimates.
Meanwhile, federal outlays would be cut $110 billion next year, with the Pentagon taking half the hit, and discretionary domestic spending the other half. Entitlement spending, which consumes nearly 60 percent of the federal budget, would be spared.
It is against that backdrop that Obama and Democratic leaders on Capital Hill seek to strike a bipartisan agreement with Republican leaders, while also taking affirmative steps to, at once, pare the annual federal deficit, which has topped $1 trillion the past four years, and reduce the national debt as a share of the nation's gross domestic product.
We confess that we are not especially optimistic that lawmakers during their lame duck session will strike a grand bargain that addresses all issues pertaining to the fiscal cliff.
For, it stands to reason, if the Senate failed to pass a federal budget each of the past three years, it's hard to imagine that the Senate, the House and the White House can work through partisan differences in the mere six weeks or so before the 112th Congress adjourns.
Indeed, President Obama already has drawn his line in the sand, demanding $1.6 trillion in new taxes over 10 years, much of which would be generated by letting Bush-era tax cuts expire on Americans with annual incomes of at least $250,000, while also limiting deductions and loopholes on such higher earners.
That places the president squarely at odds with Republican leaders in Congress, including House Speaker John Boehner and Senate Minority Leader Mitch McConnell, who have signaled their willingness to cap certain deductions and close certain loopholes, but who are adamantly opposed to higher tax rates on the putative "wealthy."
While Obama insists that he simply wants the rich to "pay their fair share," the fact is, the top 5 percent of earners pay 40 percent of income taxes, according to the Congressional Budget Office.
The entire exercise lawmakers are going through during their lame-duck session is about getting the $16 trillion federal debt under control. But imposing $1.6 trillion in new taxes is not the best way to rein in the debt, Stanford University professor John Taylor told us.
A member of the President's Council of Economic Advisors from 1989-91, Taylor, had this advice for lawmakers slouching toward the precipice of the fiscal cliff: "Agree to gradually bring spending to the level it was in 2007, when it was 19.7 percent" of GDP.
That would return the federal debt to a sustainable level, he said, without the "massive tax increase" that almost certainly would be a drag on the U.S. economy.
As it happens, Taylor's advice for reining in the national debt is not too far off from the plan put forward by the bipartisan National Commission on Fiscal Responsibility and Reform, which was created two years ago by President Obama and co-chaired by Republican Alan Simpson, the former Wyoming senator, and Democrat Erskine Bowles, the former White House chief of staff under Bill Clinton.
Simpson-Bowles, as the commission is widely known, actually proposed cutting discretionary spending by $200 billion, nearly double the reduction looming with the fiscal cliff, as well as reductions in entitlement spending, including farm subsidies and federal pensions.
The commission also proposed $100 billion in additional tax revenue by, among other means, eliminating or restricting various tax deductions.
Simpson-Bowles provides a framework for a bipartisan compromise that would set a goal of reducing federal spending to no more than 20 percent of GDP over President Obama's last four years in the White House, by making a down payment in 2013 of $110 billion in spending cuts, half from discretionary spending (rather than all, as automatic sequestration would entail) and half from entitlement savings.
Meanwhile, tax relief should remain for households earning less than $250,000 a year, while tax deductions that primarily benefit the highest-earning households should be limited or eliminated altogether as a trade-off for maintaining the two highest income tax rates as they are.
This would not be the grand bargain to solve the federal debt problem in a fell swoop. But it would put the federal government on the path to fiscal sustainability by the time Obama completes his second term.
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