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Democrats to Risk Fiscal Cliff by Targeting Top Earners

July 10, 2012

Democrats to Risk Fiscal Cliff by Targeting Top Earners

Sen. Richard Durbin, Senate Majority Leader Harry Reid, Sen. Patty Murray, and Sen. Charles Schumer. Photographer: Brendan Hoffman/Getty Images

Congressional Democrats have developed a get-tough strategy to try to force Republicans to go along with President Barack Obama’s call for higher taxes for the wealthiest Americans.

Democrats say they are prepared to go over the so-called fiscal cliff at the end of the year if Republicans continue their opposition to more revenue from top earners, allowing the George W. Bush-era tax cuts to temporarily expire for everyone on Dec. 31 and accepting scheduled spending reductions, including for Pentagon programs favored by Republicans.

Democrats who say their party blinked two years ago by not separating lower rates for the richest taxpayers from those for the middle class maintain they have the leverage to prevail this time, saying no deal on taxes and spending would be better than a bad deal.

Obama telegraphed the approach yesterday through his spokesman Jay Carney, who said the president would veto a bill to extend lower tax rates for the richest Americans. Democrats say it’s part of their drive to underscore that the main area of disagreement between the two parties is over continuing tax breaks for the nation’s highest earners.

“Republicans have been mindlessly lockstep against putting any new revenues on the table, and until they do, there will be no deal,” said Senator Mary Landrieu, a Louisiana Democrat.

Senate Democratic leaders Harry Reid and Charles Schumer have been resolute in recent caucus meetings, warning members against voting for a compromise that fails to include tax sacrifice from the nation’s highest earners, according to leadership aides.

‘Republicans’ Choice’

Maryland Representative Chris Van Hollen, the top Democrat on the House Budget Committee, said talks will go into 2013 if there’s no agreement on revenue. “This is the Republicans’ choice, either they can provide tax relief to 99 percent of the American people or we’ll get it done after the end of the year,” he said in an interview.

It’s the same dynamic, with Republicans spurning tax increases and Democrats insisting that the wealthy pay more, that’s been at play in every fiscal battle since Republicans won control of the U.S. House two years ago. Anti-tax Tea Party lawmakers had the leverage in 2011 as they brushed aside warnings about a debt default and Armageddon-like economic fallout if Congress blew its August deadline.

Upper Hand

This year, Democrats say they have the upper hand because they’ll allow more than $600 billion in tax increases and spending reductions to temporarily take effect in January rather than accept another deal with no tax increases, according to the leadership aides.

They didn’t want to be identified because they weren’t authorized to publicly discuss the Democratic strategy. The idea is that, if Republicans refuse to budge in negotiations to avert a so-called fiscal cliff following the November election, Democrats will quickly force them into a New Year compromise on tax cuts for families making less than $250,000 a year that would be made retroactive to Jan. 1, avoiding the type of economic risk that accompanied the debt-ceiling showdown.

Republicans view the Democratic approach as an unsustainable negotiating position and a bluff, according to a House Republican leadership aide.

Representative Jim Jordan of Ohio, chairman of the Republican Study Committee, said Republicans also are willing to allow the lower tax rates to lapse if it leads to a better deal for them in early 2013. That assumes the presumptive Republican presidential nominee, Mitt Romney, wins the November election.

‘Fix It’

“We have to be willing to tell the Democrats ‘OK,’” he said at a Bloomberg Government breakfast today. “The bad news is you’ve got to tell business owners out there ‘OK, you’re going to have a tax increase on Jan. 1, but come February, March we’re going to fix it.’”

In a June 29 interview on Bloomberg Television, House Majority Leader Eric Cantor of Virginia called talks about the fiscal cliff a “one-way discussion,” saying Democrats aren’t serious about a compromise.

Democrats will need Republican cooperation as Congress faces another debt-ceiling increase about the time the tax cuts are set to expire. House Speaker John Boehner of Ohio has said he won’t permit a debt increase without a larger amount of spending cuts.

January Showdown

Democrats are adamant that they don’t favor a January showdown, though they say allowing the tax cuts to expire and the spending cuts to begin may be unavoidable to push Republicans to accept revenue increases. They say this wouldn’t risk economic damage, if both parties compromise by early February.

So far, there are few signs of an agreement to replace the automatic cuts -- half of which will affect defense programs -- or a deal on taxes before the election, with leaders on both sides blaming the other for a lack of progress.

“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit-reduction package that asks millionaires to pay their fair share,” Reid said in a statement to Bloomberg.

Obama’s Decision

Democrats say their position was born of frustration over Obama’s decision in 2010 to allow a blanket extension of the 2001 and 2003 tax cuts without revenue concessions from Republicans and a deal between Obama and congressional Republicans in July 2011 to raise the nation’s borrowing limit that included spending cuts and no tax increases.

Tea Party leaders called the predictions of credit downgrades and interest-rate spikes fear mongering, and in the end, their strategy proved mostly successful as House Republicans won the last-minute agreement with Democrats. Still, the Tea Party allies had wanted far deeper cuts.

“Having moments when we blinked on core pieces of fiscal policy and the other caucus did not is what got us here,” said Senator Christopher Coons, a Delaware Democrat who said revenues and changes to entitlement programs are critical to reaching an agreement this year.

The Budget Control Act of 2011 put in place an automatic spending-cut mechanism that would trigger if Congress doesn’t reduce the deficit by an additional $1.2 trillion over 10 years. The reductions set to take effect in 2013 would be split, with $500 billion in defense cuts and $700 billion in reductions to non-defense programs.

Economic Fallout

The nonpartisan Congressional Budget Office has issued a report saying the economy would shrink by 1.3 percent in the first half of next year if the higher tax rates and more than $100 billion in automatic cuts are kept in place. The economy would rebound at a 2.3 percent growth rate in the second half of the year, according to the CBO.

Republicans, for their part, point to recent comments from some Democrats taking a different approach, including former President Bill Clinton, who said June 5 on CNBC’s “Closing Bell” that extending tax rates is “probably the best thing to do right now.”

Some Democrats may agree at the end of the year to buy negotiating time by putting off the automatic cuts and tax changes until March or later. There have been discussions among House and Senate lawmakers about funding the government through a stopgap measure that would include such a delay.

‘Down Economy’

“Remember, it was the president who said you don’t raise taxes in a down economy,” said Mitch McConnell, a Kentucky Republican and Senate Minority Leader, in a statement referring to Obama.

“Well, the economy is slower now than it was when we last extended all of the rates,” he said. “So why on earth does the president and his Democrat allies in Congress want to raise taxes and make it harder for the economy to grow, job creators to hire, and families to make ends meet?”

Democrats received backing for their stance from the Democrat-aligned Center on Budget and Policy Priorities in Washington, which issued a paper last month maintaining that the budget office forecast is misinterpreted and that Democrats shouldn’t be pressured by recession worries into a making another bad deal. The coming crisis is akin to a fiscal slope, not a cliff, the group’s paper said.

‘Erroneous Belief’

“Policy makers should not make budget decisions with long- term consequences based on an erroneous belief: that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on Jan. 2,” the paper said, citing the potential for a delay until early February. “That modest delay could produce a policy that is better for the economy over the mid-and long-term than another extension of current tax and spending policies.”

If lower tax rates expire on Dec. 31, lawmakers would have a new tax baseline in January that would free Republicans from an anti-tax-increase pledge. Grover Norquist, the president of Americans for Tax Reform, met with about 100 staff members and 20 House Republicans last month.

The pledge has become a rite of passage for many Republicans and is viewed as an impediment to a compromise on raising revenue. If all of the tax rates expire, any new tax policy would technically be scored as a tax cut, not a tax increase. Then new rates could be made retroactive, wiping out tax increases for middle and lower-income earners.

Also, some Democrats say the automatic spending cuts would be preferable to another agreement with Republicans that lacks revenue.

If the cuts go into effect, in 2016 non-defense discretionary programs would have $37 billion less in funding than the current projected levels for that year, according to the CBPP. By comparison, in the budget crafted by House Republican Budget Committee Chairman Paul Ryan, those programs in 2016 would be cut by $121 billion.

Senator Dick Durbin of Illinois, the chamber’s second- ranking Democrat, said it may take the risk of a fiscal calamity to provoke a deal that includes higher revenue.

“The idea is to bring both sides to the table with a sense of foreboding, that if we don’t reach agreements that are not altogether comfortable on either side of the table that terrible things will occur,” he said, without indicating if he endorses this approach.

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net;

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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