3 Big Hurdles in Next Rounds of Fiscal Cliff Talks
Business + Economy

3 Big Hurdles in Next Rounds of Fiscal Cliff Talks

REUTERS/Larry Downing

As congressional leaders exited the White House today after an opening round of discussions with President Obama, the mood seemed upbeat and lawmakers relied heavily on optimistic  metaphors.

Stocks initially reversed their downward slide Friday after House Speaker John Boehner, R-Ohio, deemed the talks “constructive,” a line that was echoed throughout the day and repeated later by White House Press Secretary Jay Carney. Senate Majority Leader Harry Reid, D-Nev., said, “We have the cornerstones of being able to work something out.”

But it’s the masonry around the cornerstone that counts in these negotiations. The public comments were reassuring, yet added little to what the country already knows.

Lawmakers have indicated thus far that they have a very rudimentary blueprint for reducing the deficit and avoiding the fiscal cliff of the more than $600 billion worth of scheduled tax hikes and spending cuts next year. It involves more revenues and less spending, the basic elements of any budget.

The critical question of “how” to increase revenues and lower spending—the real source of tension between Democrats and Republicans—wasn’t part of the post-meeting wrap-up on the White House lawn. Instead, the first round of talks existed to provide an iota of relief to voters who have been exhausted by the past two years of partisan dysfunction.

“I was focusing on how we send a message of confidence to consumers, to the markets in the short-run,” House Minority Leader Nancy Pelosi, D-Calif., said.

The group plans to meet again with Obama after the Thanksgiving holiday. That leaves three major questions in the weeks that follow as a bargain gets hashed out to slash as much as $4 trillion from the deficits projected over the next decade.

Will Republicans accept a tax hike on the rich?—This is quite literally the $1 trillion question.

Whereas congressional Republicans are willing to close loopholes in order to lower income tax rates, the president wants to raise rates for wealthier Americans and cap their itemized deductions to generate $1.6 trillion in additional revenues over the next decade.

When Boehner said Friday that he put “revenues on the table,” it’s unclear whether he means actual tax increases or the expectation that reforming the tax code will lead to more economic growth and, thus, higher receipts.

Congressional leaders—including Boehner—have portrayed higher taxes as an anathema to economic growth, but since Obama’s election some Republicans have suggested settling with Democrats by increasing taxes on Americans with incomes greater than $1 million.

Donald Marron, director of the Tax Policy Center, explained what Obama is offering them. First, if no deal is reached the tax breaks enacted by George W. Bush expire for everyone and income taxes jump by a total of $205 billion.

What Obama proposes is generating $1 trillion during the next 10 years from letting the tax breaks end as scheduled for those earning more than $250,000. But that’s not all. As part of a deal on the fiscal cliff, Obama is also asking for another $584 billion in tax revenue from capping itemized deductions.

The president’s “balanced” approach to taxes rests on the wealthy, since the assumption is that the middle class and the poor will be hurt by trimming entitlement programs such as Medicare and Medicare to reach an agreement.

“As rough justice, therefore,” Marron wrote in a Friday blog, “you can think of the president’s $1.6 trillion target as being almost entirely composed of his proposed tax increases on high-income households.”

Can Obama finally capitalize on public support?— Most voters support tax hikes as part of a hypothetical grand bargain on the deficit.

Only 23 percent want deficit reduction to come from spending cuts alone, according to a post-election survey released Thursday by Democracy Corps, a polling firm affiliated with Democrats. Sixty-two percent are seeking some kind of tax increases.

Those numbers should work in Obama’s favor, but they haven’t before. Polls have consistently shown that the public wants the rich to pay more to the IRS. A CBS News/New York Times survey in February, 2010 found 62 percent of the country thought letting the Bush-era rates expire for those earning more than $250,000 is a “good idea.”

But Obama extended the rates later that year as part of deal to continue long-term unemployment benefits. This time, the president plans to barnstorm the country to make his case. His strategy hinges on the appearance of being above politics, while somehow pressing voters to get much more vocal with their congressmen instead of pollsters.

“What folks are looking for—and I think all of us agree on this—is action,” Obama said before the Friday meeting. “They want to see that we are focused on them, not focused on our politics here in Washington.”

Can health care costs be controlled?— Unless Democrats also severely cut Medicare and Medicaid spending, Republicans won’t yield an inch on taxes. It’s a compromise that depends on shared pain for the base of both political parties.

Sen. Minority Leader Mitch McConnell, R-Ky., stressed after the meeting that members of his caucus “fully understand that you can’t save the country until you have entitlement programs that fit the demographics of the changing America in the coming years.”

But the real obstacle here is that medical expenses have been growing much faster than the economy. The Bureau of Labor Statistics reported Thursday that they increased on an annualized basis by 3.7 percent in October, compared to 2.2 percent for the whole of the economy.

The government could reduce its Medicare and Medicaid expenditures, only to shift more of the costs of health care onto individuals, families, companies, and state and local governments. In order to achieve targeted deficit reductions, any bargain on entitlement spending need to demonstrate that overall medical expenses can be contained.

“Simple cost-shifting would actually reduce living-standards growth going forward, running counter to what should be the underlying goal of fiscal and economic policy,” Josh Bivens, research and policy director at the progressive Economic Policy Institute, wrote in a Thursday policy memo. “Future projected budget deficits would be significantly smaller if the United States were simply able to match the performance of its industrialized peers in restraining health care cost growth.”