Understanding the President’s fiscal cliff offer

I am going to describe the President’s proposal to Republican Congressional leaders, then react to the most important parts of it. Secretary Geithner offered this proposal last Thursday.

Senate Minority Leader McConnell was right to laugh at the President’s proposal, and Speaker Boehner was right to call it “silliness.”

This is a post for intermediate to advanced readers. Except where noted, all large numbers are for the next ten years.

Items in bold are being labeled by the Administration as non-negotiable. Brackets show where I am unsure what they are proposing.

This is how the Administration describes it. I think this arithmetic is absurd and explain why below.

$4 trillion of deficit reduction relative to a current policy baseline; $1 trillion comes from the discretionary spending caps enacted in the Budget Control Act of 2011; $1 trillion comes from lowering the spending caps on Overseas Contingency Operations (aka Afghanistan and the remaining forces in Iraq); $400 B comes from unspecified savings in mandatory spending; and $1.6 T comes from tax increases. Taxes

Raise top two income tax rates permanently; Extend all other tax rates, credits, and related income tax provisions permanently; Tax dividend income as ordinary income; Estate tax: $3.6M exemption, 45% rate – These are the parameters that were in place in 2009. Capital gains rate increases to 20%; Extend the Payroll tax credit; Extend bonus depreciation for business investment; Permanently extend the Alternative Minimum Tax; Permanently extend a package of routinely expiring tax provisions, mostly for businesses, known colloquially as tax extenders. Debt limit

Increase the debt limit “permanently,” meaning further legislative action to raise in in the future would never[?] be needed again. Spending

$50 B additional highway spending in 2013 above baseline, with five years after that of $25 B more per year (total of +$175 B over six years); Permanently extend Medicare payments to doctors (aka the Sustainable Growth Rate, aka a permanent doc fix); Extend Unemployment Insurance [for how long? a year?]; the Menendez/Boxer housing refinance bill; Delay the entire 2013 sequester and find $109 B of unspecified savings to cover the deficit effect of the delay; [Propose? Support? Enact?] Tax reform in 2013 that increases taxes on the upper brackets by $600 B by capping deductions; [Propose? Support? Enact?] Entitlement reforms in 2013 that cut spending by $290 B; The 2014 sequester would [somehow] be used as an enforcement mechanism to drive tax reform and entitlement reform in 2013. Analysis

The President’s arithmetic is absurd. The BCA cap reductions were enacted 16 months ago, but Team Obama wants to count that $1 trillion again as if it is future deficit reduction. The Afghanistan OCO caps are mythical savings—the President never proposed to spend those funds, but they want to count savings by not spending them.

The $1.6 trillion in tax increases would be real if enacted. There are no budgetary or arithmetic games here, just policies I strongly oppose.

They specify no details on their $400 B in mandatory spending cuts. All entitlement programs, including the big four (Social Security, Medicare, Medicaid, and ObamaCare) are mandatory spending, as are farm subsidies, student loans, welfare payments, and a bunch of other things. But certain “offsetting receipts” also technically count as mandatory savings, even though to you and me they look much more like increased fees or asset sales (like auctioning off telecommunications spectrum). The $400 B figure is therefore, at best, a ceiling for gross spending cuts. And of course the President and Congressional Democrats keep reminding us that they won’t touch Social Security and really don’t want to cut Medicare, Medicaid, or ObamaCare.

Also, note that the President’s proposal would enact only $109 B of mandatory savings now. The other $290 B might come in 2013 as a result of entitlement reform.

I’m sure someone will ask what the total effects of the President’s proposal are on spending, taxes, and deficits. That’s a simple question with a really complex answer, and I’m not going to try to answer it today. If you’re a reporter and need to know, I’d go to Chairman Ryan’s and Chairman Sessions’ staff. Don’t try to calculate it yourself. I estimate below that the net effect of his spending proposals, however, is to increase rather than cut spending.

They measure spending cuts starting from current all-time historically high spending levels, and they measure tax increases from revenue levels which are artificially low because of the weak economy. This skews even an honest measurement of spending cuts and tax increases in favor of those who prefer higher taxes. It also means that any calculation of a ratio between spending cuts and tax increases is fundamentally misleading.

If that weren’t bad enough, Team Obama continues to try to combine previously enacted spending cuts with proposed future tax increases, and to treat them as if they were part of a package of future policy changes. I don’t use this term lightly: this is a lie. The President’s version of balance means “In 2011 we enacted a bunch of spending cuts, so now to balance it we’re going to rely almost entirely on tax increases.”

I expect Obama spokesman to claim they have more spending cuts than tax increases. They’ll add the $2 trillion of past (BCA) and mythical (OCO) spending cuts to the $400 B of spending cuts, three-fourths of which they don’t want enacted in this bill, and say that the total is more than the $1.6 T of tax increases the President demands be enacted now. That would be funny if it weren’t so dangerous.

I saved the best for last. The President is proposing spending increases, not spending cuts. He claims $400 B of spending cuts for policies he hasn’t specified, and $291 B of which wouldn’t be considered until next year. But he proposes to spend $109 B to delay the sequester for a year (GOP defense hawks will like this), and another $175 B on highways, and another $30ish B on unemployment insurance. Then he’s got the cost of Menendez-Boxer on housing (I don’t know), and the cost of a permanent Medicare doc fix (hundreds of billions, depending on the details). The net result of his proposal is higher spending, not lower.

I’ll start with something positive. Good for them for proposing a permanent AMT patch.

Note that they say “raise the top two income tax rates.” They don’t say “raise them to pre-Bush rates, with a top rate at 39.6%.” Team Obama has been fairly clear in signaling that they insist that rates go up on “the rich,” but they’re flexible on how much of a rate increase they’ll support. Their $1.6T total assumes these rates go all the way back up.

I understand that Team Obama says the rate increases, dividend policy, and estate tax are non-negotiable. Obviously we know that’s not true because they have flexibility on how much the rates would increase, but that’s what they’re saying.

The President proposes to tax dividend income as ordinary income. The President is, I believe left of some Senate Democrats on this question. They left this policy change out of their version of a bill earlier this year.

The same is true on the estate tax. The President says his estate tax proposal ($3.5 M exemption, 45% rate) is non-negotiable, yet the Democratic Chairman of the Senate Finance Committee wants a higher exemption and a lower rate, causing Senate Democrats to leave the President’s estate tax proposal out of their alternative bill earlier this year.

Extending the payroll tax credit is a bargaining chip for the President. I have no doubt he’d trade it away.

Someone needs to explain to me why Congressional Republicans would agree to make “the rich” pay $1.6 T higher taxes to avoid a $1 T tax increase on them if there is no law. The practical ceiling for tax increases on “the rich” in these negotiations seems to be just shy of $1 T. Team Obama threw the other $600 B in just to frame $1 T later as a huge concession on their part. It’s not and it won’t be when they make this move.

I understand the “no more debt limit votes after this one” provision is being labeled by the Administration as non-negotiable. If that holds, it could by itself be a deal-breaker.

Members of Congress hate voting to increase the debt limit, so some may be tempted by the President’s proposal to do away with it. But neither the President nor his party seem willing to address entitlement spending trends unless forced to do so. Senator Reid refuses to pass budget resolutions, and the President appears to have forgotten about his prior statements of wanting to slow entitlement spending growth. Republicans therefore need to insist on short-term debt limit increases to create repeated deadlines to force spending issues to be considered. Yes, this is messy and undesirable, but if the President and Leader Reid would do their job it would not be necessary.

I recommend leaving a debt limit increase out of this bill, to force a separate negotiation on entitlement spending in Q1 of next year. Future debt limit increases should be of no more than one year each until the Senate starts passing budgets.

Bob Woodward’s book describing the summer 2011 negotiations showed a President whose top priority was getting a debt limit increase big enough to avoid any further fiscal deadlines until after the election. If accurate, that suggests that the President’s new goal might be to get a new debt limit increase to last beyond 2016 so he can get all this fiscal stuff behind him and not be bothered by it.

Nothing like a cool $175 B more highway spending to start the new year, is there? This is trade bait, but Team Obama also knows that Rs are always tempted by more money for roads. Note that he didn’t ask for more money for rail or mass transit, or green energy to make it more attractive to Republican spenders.

It appears the President doesn’t want to offset the massive cost of a permanent “doc fix.” That’s really, really expensive, and it further worsens our Medicare spending problem.

I don’t know enough about the Menendez/Boxer housing bill, but I’ll bet the President would give it up to get a deal.

In this proposal the proposed $1.6 trillion in specific tax increases, hundreds of billions of dollars in detailed spending increases, and zero in specific spending cuts.

In the summer of 2011, President Obama and Speaker Boehner failed to negotiate a Grand Bargain, so they enacted a law which created a Super Committee of Congress to find $1.2 – $1.5 T of spending cuts. In case the Super Committee failed, that law, the Budget Control Act of 2011, created a backup set of sort-of-across-the-board spending cuts to hit the same $1.2 T spending cut target.

The Super Committee failed, so the spending sequester is scheduled to begin one month from now.

The President, most Democrats and many Republicans in Congress want to reduce or delay the sequester.

The President proposes a one-year delay, which would increase the deficit by $109 B in 2013. He wants to enact (in December) mandatory savings of an equal amount, but he proposes no specifics.

In this offer he promises Republicans that the tax reform and entitlement reform that they so desire will be backed up by the threat of, wait for it, the sequester that will begin in early 2014.

Why should anyone believe that a sequester being delayed now will serve as a useful forcing mechanism to drive legislation in 2013 on Republicans’ top two fiscal priorities?

This 10yr analysis horizon is BS. I want to see what happens over the next 2yr - Congressional election horizon.

Obama wants to go over the cliff. He gets what he really wants which is oppressive, confiscatory taxation, the MSM blames the Republicans and the public buys it. Neither his supporters or him really care about the jobs or the economy-this is about power and everything is going his way. While he destroys the country and the public blames his enemies, his power increases exponentially. He’s winning.

I agree that he wants to go over the cliff.

That is why the plan makes sense that is being floated - that the House pass a single bill to permanently extend Bush tax rates to the lower 98% of tax payers; vote “present” and let the Democrats vote for it and send it to the Senate.

While this sucks for the top 2%; I don't think the House is willing to go off the cliff and have taxes go up on everyone. This is face saving and it forces the President to be responsible for the outcome - which will be bad.

I would like us to go over the cliff and not vote on a debt ceiling; but our Reps just don't have the nerve.

They might succeed in blaming the Republicans. One never knows. However, since most of the voters seem to be just functioning brain stem voters, the Dems would be foolish to count on it.

0bama repeatedly said he would never let taxes go up on those making less than $250,000. When those non-thinkers see their take home pay drop, they could just twitch and blame 0bama and the Dems. Bush I was much more popular but was done in my his “read my lips” promise.

What you said is worth repeating (three times perhaps? ;-)). I’m not aware of any successful deficit reduction resulting from raising taxes. It is my experience that increased revenue is invariably followed by spending amounts greater than the revenue.

The whole process is more f’ed up than Hogan’s goat. The basic problem is that these clowns think they MUST spend money on EVERYTHING. The only way to correct this is to start at zero and rebuild. When you get to money coming into the government, you STOP.

Carter may have been a lousy President (second worst, now that 0bambi’s on the job), but at least he had the idea of zero-based budgeting.

Select five people at random and they would do a better job.

Items in bold are being labeled by the Administration as non-negotiable.

NON-NEGOTIABLE, NON-NEGOTIABLE! I don't think so. The President does not dictate to Congress. Instead of laughing at Timmy, he should have been tossed out of the office.

“my experience that increased revenue is invariably followed by spending amounts greater than the revenue”

Exactly. The more of our money Washington gets, the more it spends, and the less the money were allowed to keep is worth. They’re not morally entitled to another cent until they balance the budget, no matter how painful that may be. Failure to do that will only result in a deeper and broader catastrophe.

So, let me get this straight....

The Obama et al offer:
- a $1.6T tax increase to prevent a $1.0T increase
- hundreds of billions in cuts to unspecified and unrequested spending
- no cuts in actual spending
- non negotiable increases in taxes which will net a decrease in revenue.

WTF?

The President is proposing spending increases, not spending cuts.

Those are investments, not spending increases!

Obama wants to go over the cliff. He gets what he really wants which is oppressive, confiscatory taxation,

Those rates weren't confiscatory in 1999 and they wouldn't be confiscatory in 2013. Stop the hyperbole.

If my taxes go up $3,500 a year, that’s alot more than I paid in 1999. The fiscal cliff isn’t just about the Bush tax cuts, but brand new taxes on everyone.

It’s pretty obvious what’s going on.

Obama will agree to cuts, but won’t name any specific cuts.

He wants the GOP to name specific cuts, so he can then point his finger at the Reublicans and say “look, those selfish Republicans want to cut your ______.”

This is the same game the Democrats always play. The GOP agrees to tax hikes (and lose), and the Democrats “cave” on spending cuts, but never give any specifics. Leaving it to the GOP to name specific cuts (and thus the GOP loses again).

The Obama won’t agree to any cuts.
At least insofar as they will become reality.
For some, decreasing spending is NEVER an option.

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