December 19 2012
The Dreaded Fiscal Cliff Looms
Only a few days remain until taxes will go up an average of $2,000 as the U.S. hits the dreaded fiscal cliff. Americans know that there is a big threat to their pocketbooks—and they economy. According to the Peterson Foundation, a whopping 79 percent of Americans are concerned about the fiscal cliff.
Luckily, Speaker Boehner and President Obama have been negotiating around the clock on a $2 trillion solution. According to Politico, taxes are the main topic of negotiation:
Obama wants to increase tax rates on income over $400,000. Boehner wants the threshold to be set at $1 million; the House GOP proposal would keep the lower Bush-era rates in place for income brackets below that. In essence, Boehner is seeking $1 trillion in revenue and $1 trillion in cuts — but he doesn’t think the president is willing to get there.
While currently in a deadlock. The speaker and President are closer to compromise than at any other point in the last two years. The President has proposed a detailed plan described by Politico’s Morning Money:
Elements of the offer include: "$1.2 trillion in revenue increases on individual income ... permanent extension of provisions below $400K. Above goes to Clinton rates; $1.22 trillion in spending reductions ($800 billion + $290 billion of interest and +$130 billion in CPI spending savings) …
"$400 billion in health; $200 billion in nonhealth mandatories; $200 billion in discretionary (split 50/50 defense/nondefense); fast-track processes for corporate and individual tax reform and spending reform; superlative CPI; [unemployment insurance] benefits; permanent extension of tax extenders, AMT, SGR; sequester turned off except in select areas as part of enforcement trigger; debt limit increase for two years with periodic McConnell mechanism votes."
Speaker John Boehner (R-Ohio) told House Republicans on Tuesday he will move to a “Plan B” on the fiscal cliff by having the House vote on legislation to extend tax rates on annual income under $1 million.
The bill would allow tax rates on annual income above $1 million to rise from 35 percent to 39.6 percent, but make permanent lower rates on income below that threshold, Boehner’s office said.
If Plan B passes, the Senate is expected amend it with something very similar to the President’s plan, and send it back to the House.
What’s at stake in all of this? It’s not just your tax bill. Perhaps the biggest consequence to hitting the fiscal cliff would be a potentia downgrading of our national credit if Fitch or Moody’s credit rating agencies believe the Washington does not have the political will to fix federal deficits. According to Fitch
Failure to avoid the fiscal cliff ... would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession…That could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the U.S. would lose its AAA status.
At the end of the day, does the fiscal cliff negotiations actually matter? It does, but as Carrie points out, only to a point. If Congress cannot extend the taxes before the New Year, they can always apply them retroactively. Furthermore, the main drivers of spending, Medicare, Social Security, and Defense, will go unreformed. And if this current debate is any indication, Washington is certain not to make any progress on these critical matters any time soon.