The Right Opinion

Both Sides Must Give Ground to Avoid Fiscal Cliff

By Michael Barone · Nov. 19, 2012

In his first formal press conference in months, Barack Obama showed that getting re-elected can increase a president's confidence and combativeness. He staked out tough stands on several issues, especially on the looming budget negotiations.

Looking ahead to the “fiscal cliff” on Dec. 31, when the 2001 and 2003 tax cuts expire and sequestration cuts government spending sharply, Obama demanded $1.6 trillion of increased revenues as part of any budget bargain.

That's twice the number he and Speaker John Boehner agreed on in the grand bargain talks in the summer of 2011.

Those talks fell apart when Obama telephoned Boehner and raised his demand to $1.2 trillion. Boehner refused, and as Bob Woodward describes in “The Price of Politics,” congressional leaders of both parties worked out their own approach. Sequestration, first suggested by Obama's budget director, became part of the deal.

There's a solid argument that limiting high earners' deductions could raise $800 billion or more. A $25,000 cap on deductions, according to The Wall Street Journal, would yield almost $1.3 trillion of additional revenue. The Simpson-Bowles commission showed that broadening the tax base could net $1.1 trillion.

And there's a solid argument that raising tax rates on high earners, in conjunction with the increase that's part of Obamacare, would slow down economic growth. That's because many small businesses are taxed at the individual income tax rate.

Obama once accepted that argument, albeit reluctantly, when he temporarily abandoned his quest for higher rates in December 2010. Raising them, he conceded, would hurt while economic growth was still sluggish.

It's actually more sluggish today than it was then, although as Obama pointed out in the press conference, we are further away from the sharp economic decline of 2008-09.

In effect, Obama is giving House Republicans a choice between a growth slowdown due to higher tax rates now and the much sharper slowdown that some economists predict – 5 percent is a number bandied about – if we go over the fiscal cliff.

The political leverage seems to be on Obama's side, or so he seems to believe. Most of the media inevitably blame Republicans when Republicans and Democrats are not able to reach agreement.

Politico reports that a number of House Republicans, including some staunch conservatives, think they'll have to give in on higher rates. Many members don't want to defend them back home.

But there is also a force working against Obama: the gravity of the government's fiscal condition. The president himself has recognized that entitlement programs are on an unsustainable trajectory.

Federal spending under Obama has been 24 percent to 25 percent of gross domestic product. Even in World War II, revenues never reached that level. Since that war, the highest level was 20.6 percent of GDP in 2000, when the government was flush with tax revenues from the capital gains of dot-com founders.

Growth does increase revenue in a progressive tax system like ours.

Several participants in the grand bargain negotiations, Woodward recounts, described them as trying to solve a Rubik's Cube. Republicans wanted lower tax rates with base-broadening tax reform to provide added revenues, and they wanted changes in the trajectory of entitlements.

Democrats wanted higher rates on high earners but were not averse to broadening the tax base and were at least talking about entitlements.

The problem is not just reaching agreement, but reaching agreement on something that can get majorities in both houses of Congress.

Some members of both parties won't vote for any bargain in which the other side gets something. So leaders of both parties have to persuade colleagues that they have made sufficient policy gains to warrant the policy concessions.

History shows that can happen. In Bill Clinton's second term, he and Newt Gingrich reached agreement, with the aid of then-Chief of Staff Erskine Bowles, because there was something for both sides. Republicans got a capital gains tax cut, Democrats got S-CHIP (State Children's Health Insurance Program), and they both got a balanced budget.

Clinton and Gingrich were even making progress on Medicare reform and negotiating about Social Security until the Lewinsky scandal erupted.

House Republicans have a majority and some leverage but cannot hope to prevail on all fronts. They may decide that higher tax rates are tolerable if they can make significant progress toward spending discipline and changing the trajectory of entitlements.

In summer 2001, Obama wasn't able to produce such a package. Will the second-term Obama succeed?

COPYRIGHT 2012 THE WASHINGTON EXAMINER
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8 Comments

Tod the tool guy in brooklyn ny said:

Tax, spend, and borrow, then forget 'bout tomorrow. Only by following the Reagan-Friedman blueprint, will there be growth. "A rising tide lifts all boats." John FitzGerald Kennedy-the last real Democrat.Punishing wealthy Amerikkans hurts everbody." Wise men learn from their mistakes,but fools return to their folly, like dogs to their vomit!"Proverbs 26:11. LOL Patriots!

Monday, November 19, 2012 at 9:03 AM

Wayne in Hinesville, GA said:

Odumbo thinks he has a mandate to do whatever he wishs and the Congress has to go along with his policies. He forgets that his party doesn't control the House. It's time for the House to do its job and rein in spending, First thing to do is stop all foreign aid, reform the tax code, refuse to fund any part of the UN, do away with government agencies and give that power back to the states where it belongs(Education, Agriculture. HUD, Medicaid, etc). However, I won't hold my breath until it happens.

Monday, November 19, 2012 at 12:02 PM

Capt. Call in New Mexico replied:

I agree; perhaps we should buy some oxygen generators! All the good ideas that you mentioned won't see the light of day -- if for no other reason than that they are conservative ideas!

Tuesday, November 20, 2012 at 1:26 AM

Howard Last in Wyoming said:

When is the Republican Leadership (still an oxymoron) going to realize you can't broker an agreement with the Democraps. As for Simpson- Bowles I would not trust anything they came up with. Simpson is a RINO, he endorsed Kerry for senator from Nebraska. Does that sound like a Conservative?

Monday, November 19, 2012 at 5:25 PM

India in GA said:

"Looking ahead to the "fiscal cliff" on Dec. 31, when the 2001 and 2003 tax cuts expire and sequestration cuts government spending sharply"

Ugh. This really gets on my nerves. We can't even keep our metaphors straight.

Dec. 31 is not the edge of the "Fiscal Cliff", it's the eve of sequestration and "Taxmageddon".

The "Fiscal Cliff" is that thing you go sailing off of when your national debt exceeds 100% of GDP, you borrow 40 cents for every dollar you spend, and, for some reason, you don't see fit to reduce your spending by one dang nickel.

Oh, and lest we forget, you can't even manage to reform ONE gov't program --Medicare (which has a liability equal to 100% of every dollar in gov't revenue in just a few years).

In other words, we're AT the "Fiscal Cliff". Some might even say we've already gone over the edge; we just haven't hit the bottom, yet.

Monday, November 19, 2012 at 7:34 PM

Wayne in Hinesville, GA replied:

India, The idiots in Congress won't do anything that makes sense. They have known for years that tort reform would help cut down on expensive tests that doctors use for fear of being sued. The lousy amount that Medicare pays doctors causes them to overbook and to try and see as many patients as possible every day. It is nothing unusual in my area to have an appointment at 1:00 and finally see the doctor at 3:00 or 4:00. Now under Obamacare it is going to be even worse. We have undoubtedly the worst Representatives and Senators in Congress today that we've ever had. They care nothing about the country or the people. Remaining in office is their only concern. God help us because they sure won't!

Monday, November 19, 2012 at 9:00 PM

Army Officer (Ret) in Kansas said:

I seem to recall a certain Kenyan's teleprompter saying something about elections having consequences. Well... it seems to me that Republicans won enough elections to control the U.S. House of Representatives, and THAT is the part of government that initiates all spending (last time I checked the Constitution - and assuming it is still in force).

Well, Mr. Obama, as you are so fond of saying: "Elections have consequences." The American people did not trust your side with the keys to the treasury in the last election. Deal with it.

So I guess it's put-up-or-shut-up time for the Republican Congress (again). If they REALLY believe all that hyperbole about this being "The Mostest Importantist Election in the Whole History of the Universe and all other Possible Universes From the Beginning of Time Until the End of Eternity and Beyond!" they need to use whatever means remain at their disposal to stop Obama's rush to disaster. NOW we will see if the Republicans will do their job or allow Obama to continue rampaging through the economy.

As the majority party in the House of Representatives, Republicans can absolutely stop Obama in his tracks IF they unite to do so. But who am I kidding? They'll cave in like they always do. They may huff and puff before he calls their bluff, but Obama will offer them a fig leaf and get most of what he wants.

And when (not if) they do, I will consider it further vindication (as if any more were needed) that the differences between "R's" and "D's" are trivial.

Monday, November 19, 2012 at 8:53 PM

Robinius in Broomfield, Colorado replied:

Army Officer, you say you checked the Constitution. I wish we could get our President to do that once in a while. I wish we could get him to obey his inaugural oath to uphold it, too. He's going to take that oath again on January 20, 2013, and will be lying his ass off - again.

Monday, November 19, 2012 at 11:31 PM