Understanding the President’s fiscal cliff offer

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.

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

President Obama’s opening bid

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

Arithmetic

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

Arithmetic

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.

“Balance”

Team Obama makes a big deal about balancing spending cuts and tax increases.

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.

Taxes

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.

Debt limit

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.

Spending

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.

Future promises

Follow this logic.

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.

See anything wrong with this logic?

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?

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

This is not a serious offer.

(photo credit: Paul Couture)

3 responses

  1. Hi Keith – your bolded roundup at the end focuses on my main concern and complaint with all of this mess. Since the cliff is the simple enactment and enforcement of a prior deal (which was made because a previous deals could not be made), how can anyone enter into a new deal which promises more of the same and will rely mostly on future action?

    It’s nonsense!

  2. Pingback: Where Are the President’s Spending Cuts? | Western Free Press

  3. Pingback: Obama’s Lose Lose Negotiating at US Action News

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