Fiscal cliff diving

Fiscal cliff diving

It has been more than a month since I last posted.  With statements Wednesday by Speaker Boehner and today by President Obama about the upcoming “fiscal cliff,” this seems as good a time as any to dive back in.  This initial post will assume a fairly high amount of baseline knowledge.  I may return to the basics in later posts (as I said I would do a while back).

I will describe and interpret both leaders’ statements, then offer a little analysis of the two positions together. I need to emphasize that at this early stage, anyone’s interpretations and predictions are highly speculative. I am doing little more than making educated guesses; then again, so is everyone else.

Both leaders deserve credit for making serious and fairly detailed policy speeches. Both are contributing significantly to the public debate by laying out their views and arguments for all to see. Public policy would be sufficiently improved if we had more serious public discussion like this.

Speaker Boehner’s statement

Speaker Boehner opened that public discussion on Wednesday.

  • He frames the election result, in which President Obama and a House Republican majority were both reelected, as “a mandate for us to find a way to work together,” not “to compromise on our principles,” but instead “to creating an atmosphere where we can see common ground when it exists, and seize it.”  His general tone is cooperative.
  • He leans heavily against trying for Grand Bargain II during the lame duck session. He probably thinks (correctly) that it’s infeasible. Based on earlier press reports, he may also think it’s inappropriate to make such large policy changes with a bunch of retiring members. Better to wait for the new Congress and take the time to do it right.
  • Here is his key language for the next two months:

What we can do is avert the cliff in a manner that serves as a down payment on – and a catalyst for – major solutions, enacted in 2013, that begin to solve the problem.

  • As a policy matter he criticizes temporary policy changes. As a practical legislative matter, he suggests a short-term trade (which I’ll describe in a moment) to buy up to a year to legislate a big fiscal solution.
  • For that bigger solution he is explicit about being willing to agree to more total government revenues, but only under a few conditions:
    • Those revenues should come as part of base-broadening tax reform that produces faster economic growth;
    • That tax reform should lower marginal tax rates;
    • This should “mak[e] real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions.”
  • He explicitly links higher revenues to entitlement reform that cuts spending:  “[T]o garner R support for new revenues, the president must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt”
  • I can’t find an explicit indication that the Speaker is willing to have higher taxes on “the rich” (however one defines that), but I think it’s implied.  It was certainly true in the Portman/Toomey offer in the SuperCommittee last fall.  More on this in a bit.
  • Finally, he says “the President must lead.”

Here’s my summary of the Boehner formula:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

If I am interpreting him correctly, the key trade implied by Speaker Boehner is that Republicans would agree to higher average tax rates paid by the rich, but not higher marginal tax rates.  The rich would therefore pay higher taxes, but the tax on their last dollar of income would not go up.  Thus more revenue would be raised from them, and they would be paying more in taxes, but their incentive to work and invest more at the margin would not be dulled.  The Speaker conveys this by distinguishing between “revenues” and “tax rates.”

Some in the press have reported this as a new policy position for the Speaker. While it’s more directly stated and blunt, I’m not seeing any significant change from his position in the summer 2011 Grand Bargain negotiations with the President. My simple version is that the Speaker is taking his then-private (but well-known) position public, and suggesting an open legislative process instead of private one-on-one negotiations. Any reporter who frames this as a big policy change hasn’t been paying close attention.  Despite everything you’ve read, the bright line that Republicans purportedly drew on taxes was always somewhat blurry.

It is, however, unclear to me what the Speaker means by a down payment to be enacted in the lame duck session.  My best guess is that it might involve some modest entitlement reforms, plus scaling back some tax preferences for high-income tax filers, plus an extension of all current (2012) rates.  If I’m guessing right, the short-term deal would include higher average taxes for the rich but no increases in their tax rates.  I think the Speaker’s long-term framework would require their marginal tax rates to decline as a part of tax reform, rather than just not increase.  I emphasize that here I’m really just guessing.

The President’s statement

OK, let’s do the same with the President’s statement today.

  • “Confrontational” is too strong to describe the President’s language and tone. “Insistent” is probably better.  It’s not surprising that the President insists the election gave him a mandate to implement his fiscal policies.  Key quote:

On Tuesday night we find that the majority of Americans agree with my approach. That’s how you reduce the deficit … with a balanced approach. … So our job now is to get a majority in Congress to reflect the will of the American people.

  • Like Speaker Boehner, the President is reiterating his earlier substantive position.  He wants to extend all income tax rates except for those with incomes greater than $200K/$250K.  He wants those rates “for the rich” to be allowed to increase on January 1 as they will if there is no new law.
  • The President praises the Senate for passing a bill that matches his policy of raising tax rates for incomes > $250K, and he says the House should pass that bill and he would sign it.  But aside from this statement, he does not insist that tax rates on the rich pay more.
  • He also reiterates major elements of his budget: spending increases on education, infrastructure, clean energy, and veterans, along with (a claimed) “$4 trillion of deficit reduction over the next decade.”
  • Interestingly, he does not frame the choice as “raise taxes on the rich to reduce the deficit.”  He instead frames it as “raise taxes on the rich and cut spending to reduce the deficit and make needed investments (i.e., government spending increases).”
  • Once again his key word is that any deficit reduction package must be “balanced.” By this he means that it must raise taxes on the rich.
  • He hits hard, a couple of times, that the short-term solution should be the common denominator – Congress should extend the tax rates except those for the rich.  The top tax rates, he suggests, can then be negotiated as part of a broader fiscal deal next year.
  • He also says

I was encouraged to hear Speaker Boehner agree that tax revenue has to be part of the equation, so I look forward to hearing his ideas when I see him next week.

Here’s my summary of the Obama formula:

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

It appears that President Obama also has low expectations for a Grand Bargain II during the lame duck session. I think the most positive thing that can be said about the President’s statement today is that he didn’t say anything that clearly made a deal more difficult.  With one important exception, he didn’t budge on substance or even frame his prior positions in a more conciliatory or cooperative manner.  That shouldn’t be too surprising in an opening framing statement for negotiations, but it’s a pretty sharp contrast with the Speaker’s statement yesterday.

The one important exception is that today the president did not insist on raising tax rates on the rich, only that they “pay more in taxes.”  I assume this was intentional.  It allows for at least a portion of the deal like that suggested by the Speaker’s comments:  scale back tax preferences for the rich without raising their marginal rates.  Of course, that’s only part of what the Speaker said was necessary, but it’s a critical part.

Analysis

Let’s compare the two formulas:

Boehner:  tax reform that lowers marginal rates + real changes to the financial structure of entitlement programs ==> faster economic growth + higher revenues + lower deficits + higher average tax burden on “the rich”

Obama:  higher taxes on the rich + spending cuts + spending increases ==> faster economic growth + higher revenues from the rich

Both formulas are incomplete so far, in that neither covers the sequester or the debt limit.  The sequester kicks in January 1 if the law isn’t changed.  The debt limit is on a slightly slower timeline.

Initial press coverage focuses on the possibility of a deal on taxes on the rich.  As you can see, there are a lot of moving parts left to resolve even if they do work out that biggest difference.

The key conclusions I draw about this week are:

  • A Grand Bargain II in the lame duck session is highly unlikely.
  • Both sides appear willing to continue that negotiation next year, maybe through the traditional legislative process rather than in private.
  • A middle ground on one issue could involve higher average tax rates for the rich with no increase, or even a cut in their marginal rates. This could be accomplished by scaling back tax preferences for high income tax filers.
  • The Speaker needs to do this, substantively and politically within his conference, through tax reform.
  • Both sides appear willing to discuss entitlement spending changes.  The Speaker is once again more aggressive on these than the President, and the Speaker insists that any revenue increases must be accompanied by entitlement spending changes (often mislabeled as “cuts”).

Q:  OK, but that’s next year.  What about now?  What’s going to happen between now and the new year?

A:  I have no idea. Neither does anyone else, including the participants.  A smaller version of that deal is, in theory, possible during the lame duck session:  incremental changes to the major entitlements plus scaling back tax preferences for the rich, and keeping all the rates in place for, say, a year.  This could fit the Speaker’s idea of a “down payment on reform,” and could meet the President’s test of having the rich pay more, without crossing the Speaker’s bright line of not raising anyone’s rates.  There are a lot of moving parts in that deal.  It’s possible to do such a deal if both sides are skilled and constructive negotiators.  Those are big IFs.

I apologize for the complexity of this post—there are a lot of moving parts, and I’m doing the best I can to clarify things.  Even if I’m a bit lucky and right on all of this, my answer is still incomplete because it leaves the short-term sequester questions unanswered. I am afraid at this point it’s the best I can do.  I will try to improve my analysis as we move forward.

(photo credit: Sam Effron)

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