Splitting the Difference on the Fiscal Cliff

Both President Obama and House Republicans have presented their opening plans to avert the “fiscal cliff”—the combination of tax increases and spending cuts that could give the economy a $600-billion double whammy come January 1st.

But despite the hysteria on Wall Street and in some segments of the media, a deal is actually getting closer as Republicans appear ready to cave on tax increases for the wealthy.

Elections do have consequences.

Yes, the president threw in the kitchen sink, and Republicans recycled their last budget proposal, but if you throw out the rhetorical nonsense and split the difference, here’s what you’ll get:

Marginal tax rates increase for top earners as the Bush tax rates expire for those making over $250,000 a year. Having those rates revert back to Clinton-era levels (39.6% top marginal rate, 20% capital gains taxes, dividends taxed as ordinary income and estate taxes at 2009 levels) would bring in roughly $950 billion over ten years, according to the Committee for a Responsible Federal Budget(CRFB).

But if you raised the top rate to 37%, bumped up the top dividend taxes only to 20% and compromised on estate taxes, I’d guess you’d bring in $400-$500 billion to the Treasury.

Deductions for top earners are capped. Republicans have vowed to get $800 billion in new revenues “through pro-growth tax reform that closes special-interest loopholes while lowering rates.” But using a throwaway idea from Mitt Romney’s presidential campaign, the Tax Policy Center estimates that limiting deductions to $50,000 would bring in $700 billion.

So, the total would be around $1.2 trillion over ten years, about halfway in between the two offers.

President Obama met with Treasury Secretary Tim Geithner, House Speaker John Boehner, Senate Majority Leader Harry Reid and other Congressional leaders last month.                             Official White House photo by Pete Souza.

Cut entitlement spending.  The differences here are narrow: The president proposes to cut $350 billion from federal health care programs over the next decade, while Republicans want to cut $600 billion, including raising the Medicare eligibility age.

I doubt the latter is going to happen, but the two sides are pretty close, and I think the president will agree to cut $400-$500 billion.

Other spending cuts. The president claims to reduce the deficit by $4.4 trillion over the next ten years, but that number includes $1 trillion of already enacted spending cuts, $800 billion from winding down Iraq and Afghanistan, and $600 billion in lower interest on the national debt. It’s really rubbish, except for the $1 trillion from the very “sequester” that’s giving everyone conniptions.

The automatic spending cuts will be restructured to do the job the Congressional super committee couldn’t do last year—make hard decisions on where the money will go.  The president proposed $250 billion from spending cuts and new fees. Republicans are looking for $600 billion in additional spending cuts. Let’s split the difference again and say $400 billion.

So, here’s the grand total:

  • $1.2 trillion in new tax revenues from the wealthy
  • $400 billion in cuts to Medicare and Medicaid
  • $400 billion in other spending cuts
  • $1 trillion from the current (restructured) sequester.

Total: $3 trillion, and over $4 trillion if you use Washington funny math.

Gone will be the president’s proposal to continue the payroll tax holiday, hike infrastructure spending and extend unemployment benefits, as well as the GOP’s idea to measure inflation differently for Social Security.  Congress will maintain control over the debt limit, but it will likely be extended two to four years.

I don’t think all of this will get done before December 31st, but the outline will be there and the whole thing will be signed, sealed, and delivered by next June.  The economics are there for this deal; now, the politics are starting to fall into place, too.


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