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Dec 5, 2012 12:58 PM by Matt Stafford

Makings of a US fiscal deal behind hot rhetoric

WASHINGTON (AP) - One central question, after all the bluster is cut away, stands between the White House and Republicans in Congress reaching a deal that would prevent the U.S. economy from falling off the so-called "fiscal cliff" - the issue of taxes.

President Barack Obama insists that government income be increased $1.6 trillion partly by raising the tax rate on high income Americans. The Republicans have proposed that government revenue increase $800 billion through elimination of tax loopholes and reducing income deductions. That disagreement is closely tied to the related issue of government spending, especially on highly popular social programs like Medicare health insurance coverage for Americans at age 65.

Obama, meanwhile, laid out a hard position Wednesday on threats from some Republicans to create another fight over the nation's debt ceiling, telling business leaders it's "not a game that I will play."

Obama said in remarks to the Business Roundtable that he has heard of reports that Republicans may be willing to agree to higher tax rates on the wealthy and then come back in 2013 with more leverage to extract spending cuts in exchange for raising the government's borrowing limit.

Obama says that approach is "a bad strategy for America." He told the group of chief executives that he wants to break that habit before it even starts.

A portion of the current fiscal cliff threat arose from an agreement to institute major spending cuts starting Jan. 1 - cuts that both Democrats and Republicans oppose - as part of a deal last year to raise the nation's debt ceiling. Current law requires Congress to sign off on raising borrowing power. Legislators routinely approved greater indebtedness, until the two most recent times it came up.

Last year's brutal fight over the U.S. debt limit led the nation to the brink of default for the first time in its history. The move prompted Standard & Poor's to take the drastic step of stripping the government of its "AAA" rating on its bonds, a sign of the toll of the political debacle.

Those conflicts aside, however, proposals from both sides already have significant overlap in their competing budget proposals that could form the basis for a long-term deal that would avert what some economists call a potential catastrophe.

The Obama administration and House of Representatives Speaker John Boehner continue to ridicule the negotiating stances of the other side. But beneath the tough words were the possible makings of a deal to avoid the cliff, which is a combination of expiring tax cuts and automatic, across-the-board spending cuts due to take effect in January.

Economists warn the fiscal cliff, a result of prior failures of Congress and President Barack Obama to reach a lasting deal, could plunge the U.S. economy back into recession.

While the White House and Congressional Republicans disagree philosophically on tax rates for the rich and spending cuts to popular benefit programs, both sides now concede that tax revenue and reductions in entitlement spending are essential elements of any deal.

If the talks succeed, it probably will be because Boehner, the most powerful Republican in Washington, yields on raising tax rates for top earners. The White House, in turn, would likely have to bend on how to reduce spending on Medicare, the federal health care program for the elderly, and some changes in Social Security, the government pension program.

The possible makings of a deal could borrow heavily from a near-bargain last year during debt-limit negotiations.

Then, Obama was willing to reduce cost-of-living increases for federal Social Security pension beneficiaries and increase the eligibility age for Medicare, as Boehner and other top Republicans have demanded. On Tuesday, Obama did not shut the door on Republican ideas on such entitlement programs.

"I'm prepared to make some tough decisions on some of these issues," Obama said, "but I can't ask folks who are, you know, middle class seniors who are on Medicare, young people who are trying to get student loans to go to college, I can't ask them to sacrifice and not ask anything of higher income folks."

"I'm happy to entertain other ideas that the Republicans may present," he added in an interview with Bloomberg Television.

At the core, the negotiations center on three key points: whether tax rates for upper income taxpayers should go up, how deeply to cut spending on entitlements such as Medicare and how to deal with raising the government's borrowing limit early next year.

White House spokesman Jay Carney dismissed Boehner's proposals as "magic beans and fairy dust."

Boehner countered: "If the president really wants to avoid sending the economy over the fiscal cliff, he has done nothing to demonstrate it."

Tax rates have emerged as one of the most intractable issues, with Obama insisting the rates on the top 2 percent of earners must go up and Boehner standing steadfast that they must not.

Boehner, instead, has proposed raising $800 billion through unspecified loophole closings and limits on tax deductions.

On Tuesday, the president said he would consider lowering rates for the top 2 percent of earners - next year, not now - as part of a broader tax overhaul effort that would close loopholes, limit deductions and find other sources of government revenue. "It's possible that we may be able to lower rates by broadening the base at that point," Obama said.

The two sides are also close, at least in theory, on curbing spending on a host of miscellaneous programs, as well as new fees. These could lead to higher airline ticket prices, for example, an end to Saturday mail delivery, fewer food stamps and lower farm subsidies.

Republicans claim they could glean $300 billion from such cuts and fees over 10 years; the White House promises $250 billion.

So far, the public seems ready to hold Republicans responsible if negotiations fail. A new Washington Post-Pew Research Center poll shows that 53 percent say the Republicans would deserve blame if the nation tips over the fiscal cliff, and only 27 percent of those surveyed say Obama would be to blame.

Forty-nine percent don't believe Obama and Congress will reach a deal by Jan. 1, whereas 40 percent are more optimistic.

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