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5 Ways the Fiscal Cliff Drama Could Play Out


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.’’