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5 Ways the Fiscal Cliff Drama Could Play Out

The edge is near: 24 days out, the outcome is still very much up in the air.

by
Bill Straub

Bio

December 7, 2012 - 12:03 am

WASHINGTON – The high stakes cat-and-mouse affair familiarly known as the fiscal cliff is rapidly approaching an end game with few clues to the final outcome.

House Speaker John Boehner (R-Ohio), the GOP’s lead negotiator on how to best whittle down the federal debt, has grudgingly conceded that taxes paid by those earning $250,000 and above per annum will have to rise in order to address a still-ailing economy. Boehner and his allies want to accomplish that fete without raising tax rates.

But President Obama, to this point, isn’t buying, telling the Business Roundtable on Wednesday that “it is not possible for us to raise the amount of revenue that’s required for a balanced package if all you are relying on is closing deductions and loopholes.’’

“We’re not insisting on rates just out of spite or out of any kind of partisan bickering,’’ Obama told the nation’s business leaders. “But rather because we need to raise a certain amount of revenue.’’

Senate Republican Leader Mitch McConnell of Kentucky is equally critical of the president’s package, thickening the fog over how a deal might ultimately emerge.

“With just a few weeks to go before a potentially devastating and entirely avoidable blow to the economy, the president proposed a plan that the members of his own party won’t even vote for,’’ McConnell said Thursday. “So I think it’s safe to say at this point that the president isn’t interested in a balanced agreement. He’s not particularly interested in avoiding the fiscal cliff. And he’s clearly not interested in cutting spending.’’

The origins of this ongoing budget debate can be traced back to actions taken by the Obama administration and the 112th Congress. Unable to agree on ways to hack the national debt, which now exceeds $16.3 trillion, the two factions decided to send the issue to a joint congressional panel, known as the Super Committee, with instructions to decrease the deficit by $1.2 trillion over 10 years.

Legislation creating the Super Committee set several initiatives into motion if their efforts went belly up – lower tax rates adopted during the administration of President George W. Bush would expire, automatic spending cuts in discretionary spending and defense would go into effect, and more families would find themselves targeted by the alternative minimum tax.

The Super Committee failed so the provisions contained in the Budget Control Act of 2011 are slated to go into effect on Jan. 1, 2013. Economists warn the changes could spark a recession. It was Federal Reserve Chairman Ben Bernanke who coined the term “fiscal cliff,’’ telling the House Financial Services Committee in February that “a massive fiscal cliff of large spending cuts and tax increases” was approaching.

A number of fiscal cliff scenarios are circulating, many of which stand little to no chance – some conservative lawmakers in the House, including Rep. Louie Gohmert (R-Texas), are taking the opportunity to advance the implementation of a “flat tax’’ that would set low rates with few, if any deductions. The proposal has attracted limited support.

Any agreement is going to require give-and-take from both sides. Elements in several plans floating around will undoubtedly find their way into the final package – if one emerges.

Some of the scenarios include:

The White House

President Obama has long been advocating what he refers to as “a balanced approach.’’ His proposal would reduce the deficit by about $4 trillion over 10 years by raising tax revenues a total of $1.6 trillion and implementing about $600 billion in program cuts, with most of that money coming from Medicare and Medicaid. The plan also counts on $1 billion in savings as a result of the end of the wars in Iraq and Afghanistan and $1 trillion in cuts that already have gained congressional approval.

Republicans remain adamantly opposed to the tax portion of the package, which would raise the top income tax bracket – families with incomes of $250,000 or more per annum – from the 35 percent set during the administration of President George W. Bush to the 39.5 percent adopted under President Bill Clinton. The president also wants to hike the tax rates on capital gains from 15 percent to 23.8 percent.

Obama also has slipped in some provisions close to his political heart, like $200 billion in new spending to bolster a sagging economy and removing congressional authority over the federal debt limit.

House Republicans

The Boehner plan is a bit more ambitious than the one circulated by the White House, calling for a deficit reduction of $4.6 trillion over 10 years. The plan would retain the tax rate cuts imposed during the administration of President George W. Bush – including the 35 percent top rate – but pull in an additional $800 billion over 10 years by either killing some tax breaks or deductions or by capping deductions at a certain amount, maybe $50,000.

In addition, the GOP would reduce Medicaid and Medicare spending by $900 billion and introduce additional cuts in discretionary spending by $300 billion.

Simpson-Bowles

There remains a slim possibility that White House and lawmakers may turn to the report issued by the National Commission on Fiscal Responsibility and Reform, popularly known as Simpson-Bowles, after the two chairmen, former Republican Sen. Alan Simpson (Wyo.) and Erskine Bowles, a Democrat who served as chief of staff during the Clinton administration.

The panel was established by Obama in 2010 to offer “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.’’ The final report failed to garner sufficient support from commission members to serve as an authoritative proposal. But it offers some ideas that may serve as a guidepost.

Simpson-Bowles cuts the deficit by a little over $4 trillion over 10 years with a “balanced’’ plan — two-thirds spending cuts and one-third tax reform. The final report called for lowering tax rates — the top rate would fall from 35 percent to 29 percent – but increasing revenues by $1.2 trillion by repealing a host of tax breaks, deductions, and credits. The plan also seeks to simplify the tax code.

It also achieves $485 billion in healthcare savings and establishes a formula to limit healthcare spending growth. The package further called for an additional $300 billion in savings from programs like agriculture and federal retirement and limited future spending growth to one percent below inflation, saving about $625 billion.

Simpson-Bowles was overwhelmingly rejected in the House and never fully embraced by Obama, although Treasury Secretary Tim Geithner has sung its praises.

Kick the can

Both sides maintain that delaying major decisions on how best to reduce the deficit is a bad idea – but it remains a possibility.

This scenario simply calls for retaining current tax rates while repealing the budget-cutting provisions contained in the Budget Control Act of 2011 – thus protecting the military and health programs from looming cuts.

The result would be leaving major budget and tax decisions to future congresses and administrations. The idea is reviled but, given the partisan gap, still a possibility. The nonpartisan Congressional Budget Office (CBO) maintains, however, that extending tax cuts and canceling the automatic spending cuts should result in modest growth over the short term and no major economic hit.

“The worst thing that can happen, frankly, from my perspective, is if they just kick the can down the road,’’ Defense Secretary Leon Panetta said during a recent speech before the Center for a New American Security. “All that would wind up doing is continuing to present a shadow over the Defense Department and for that matter the rest of government as to what would happen and that’s the damn last thing I need.’’

Do nothing

Support for simply letting the provisions contained in the Budget Control Act of 2011 go into effect has gained currency. Sen. Patty Murray (D-Wash.), who served as chairman of the Super Committee, has expressed a willingness to jump if Republicans refuse to compromise on taxes.

Under the fiscal cliff, all Bush-era tax cuts will expire, including those aimed at the middle class. It also calls for across-the-board spending cuts, technically known as sequestration, broadens the alternative minimum tax, and kills the current 2 percent Social Security payroll tax cut. Defense and healthcare programs would be particularly hard hit.

Under this scenario, the CBO estimates the deficit would be cut by about $560 billion. But the agency also warns that the nation’s gross domestic product could fall dramatically, forcing another recession that could result in the loss of an estimated 2 million jobs.

Obama insists it won’t come to that.

“Now, we’ve seen some movement over the last several days among some Republicans,’’ Obama told the Business Roundtable. “I think there’s a recognition that maybe they can accept some rate increases as long as it’s combined with serious entitlement reform and additional spending cuts. And if we can get the leadership on the Republican side to take that framework, to acknowledge that reality, then the numbers actually aren’t that far apart.”

“Another way of putting this is we can probably solve this in about a week; it’s not that tough. But we need that conceptual breakthrough that says we need to do a balanced plan; that’s what’s best for the economy; that’s what the American people voted for. That’s how we’re going to get it done.’’

Washington freelancer Bill Straub is former White House correspondent for Scripps Howard News Service.
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