Friday, November 30, 2012

Going Down the "Fiscal Slope" in January


What is the Fiscal Cliff?  Or is it more of a Gentle Slope?

Source: San Francisco Chronicle
The term refers to the tax cuts that would expire and the automatic spending cuts that would take effect if Congress fails to act by year's end.

Why the deadline? Congress created it to compel action if a so-called supercommittee failed to find common ground on deficit reduction. It failed.

Tax increases: Expiration of the Bush-era tax cuts, along with a scheduled increase in the payroll tax, would raise taxes on all Americans by several percentage points.

Spending cuts: Federal spending would be trimmed by $1.5 trillion over the next decade. The few exempted areas include Social Security, Medicaid, military pay and veterans benefits.

Unemployment: About 2 million Americans will lose jobless benefits if the extended safety net program expires on Dec. 29.

Source: The Economist

What has Obama offered the Republicans so far? 
He sent Tim Geitner to Capitol Hill with this plan:

From Huff Post
Geithner's offer would delay the sequester -- automatic spending cuts to the Pentagon and social programs -- for a year, and effectively eliminates the congressional requirement to lift the debt ceiling in perpetuity. The offer included an extension of unemployment insurance, the payroll tax and even money to help homeowners modify mortgages and invest in infrastructure. "I think there was a leprechaun in there somewhere, too," quipped one GOP aide.
The proposal is based on a two-step plan that would decouple the high-end tax and capital gains rates from the middle-class rates, extending only those for the middle class. It would revert estate taxes to their higher 2009 level, and raise an additional $600 billion in taxes elsewhere, according to the GOP summary. It then proposes tax reform required to raise at least as much as the tax hikes, and entitlement reform that would trim $400 billion from the programs.

Are Republicans really going to reject all offers to deal with Obama?
Will they remain loyal to the Tea Party and Grover Norquist?
Most sources behind the scenes say the smart people among them know taxes have to go up and they have to deal. Speaker Boehner seems to be holding to the Tea Party talking points, but interestingly his back-up team are getting the word out, so we can assume he is probably posturing for the camera.

Oklahoma Senator Tom Cole on NPR's All Things Considered:
SIEGEL: . . . a surprise from one of the top Republicans in the House. He broke ranks with his GOP colleagues. While they are holding out for an extension of all Bush-era tax cuts, Oklahoma Republican Tom Cole told members of the leadership team yesterday that they should hurry up and extend tax cuts for the bottom 98 percent of taxpayers.

BLOCK: As for the top 2 percent, Cole argues, Congress can worry about them later. NPR's David Welna caught up with Cole today and has this report.

DAVID WELNA, BYLINE: Oklahoma Republican Tom Cole just got re-elected to a sixth term in the House. He serves there as the GOP majority's deputy whip, and he's a close friend of Speaker John Boehner, which is why a lot of his colleagues were surprised when Politico first reported that Cole urged his colleagues in a closed-door meeting to approve an extension this year of all the expiring tax cuts except those that affect only the top 2 percent.

REPRESENTATIVE THOMAS JEFFERY COLE: We have an opportunity to make sure that the tax rates for 98 percent of the American people don't go up. I think we should do that sooner rather than later.

WELNA: That's Cole this afternoon.

COLE: I'm not trying to persuade anybody. I was asked: In my opinion, what's the best position for us to take? You know, what's in the best interest of the American people? What's in the best interest politically? I think that position that I outlined - that is, making sure that 98 percent of the American people have tax security, so to speak, and then continuing to fight on the other issues, and it doesn't mean giving in to rate increases. I don't believe in that. That's the right thing to do.

Senator John Thune (R-SD) on Fox News via ThinkProgress
MARTHA MAcCALLUM (HOST): What I’m asking you is are Republicans willing to hold the line, to say to the President, I am sorry, we will never agree to a deal that involves an increase in taxes? Are they?

THUNE: I think any deal that passes up here that raises taxes and raises taxes as I mentioned earlier on small businesses, Martha, is not going to enjoy Republican support. Now, there may be enough Republicans who would vote for something like that to pass it in the House of Representatives, they need to get to 218 votes.

MAcCALLUM: Then it would be done, right?

THUNE: We’ll see about that. We don’t know what that. We don’t know what the contours of a final deal might look at this point. Everybody right now is sort of in their corners and doing the posturing.

What happens if Congress does nothing? 
This article has a good explanation of what would probably happen:

Guardian UK
. . . all this discussion about a fiscal cliff is a bit of a misnomer – a cliff suggests a precipitous fall to a likely demise. But in reality, this cliff is more of a slope, or a slow but steady decline, down the road of fiscal austerity. Yes, tax and spending policies will shift after 1 January: taxes will go up and spending cuts mandated by law will begin to go in effect. But these are changes that will unfold over many months, and even years. Indeed, the immediate impact of the "fiscal cliff" will be relatively minor. As the Center for Budget and Policy Priorities noted recently:

"A relatively brief implementation of the tax and spending changes required by current law should cause little short-term damage to the economy as a whole."

This isn't to say that markets won't have a collective freakout or that confidence in Congress to actually do its job will decline further, but those are manageable issues, particularly because, once Washington goes over the cliff, it becomes much easier to quickly reach a deal between Republicans and Democrats.

. . . Let the tax cuts expire on 1 January, with taxes going up on every American. Then, Congress can quickly pass a massive tax cut for those making less than $250,000, retroactive to 1 January. Neither side will want to wait long and force Americans to pay higher taxes, but especially Republicans won't – as they will likely be blamed if no deal is swiftly reached. To do so would mean that all sides are politically satisfied: President Obama can say he stuck to his word about raising taxes on rich Americans, and taxes will have gone up without Republicans having to cast a vote; and both parties can reap the political benefit and claim credit for having cut taxes for the middle class.

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