Bloomberg News

U.S. Fiscal Cliff Showdown Turns Into Early Blame Game

November 15, 2012

President Barack Obama

President Barack Obama said if Republicans won’t budge, “middle-class families are all going to end up having a big tax hike” at the end of the year. Photographer: Joshua Roberts/Bloomberg

President Barack Obama and congressional Republicans, heading into a six-week showdown over the fiscal cliff, are already making arguments that would pin a possible economic recession on the other side.

The president, in his first post-election news conference yesterday, laid the blame for a potential collapse of negotiations at the feet of Republicans who won’t raise tax rates.

If Republicans won’t budge, “middle-class families are all going to end up having a big tax hike” at the end of the year, Obama said. “That’s going to be a pretty rude shock for them, and I suspect will have a big impact on the holiday shopping season.”

Republicans are citing what they call a gap in presidential leadership. It’s Obama’s responsibility, they say, to first present a plan that makes concessions on trimming entitlement programs such as Medicare. If he doesn’t, they see end-of-year leverage in being able to blame an aloof president insistent on raising taxes on top earners.

If Congress doesn’t act by year’s end, $607 billion in automatic spending cuts and tax increases are scheduled to begin taking effect in January. Taxes on ordinary income, capital gains, dividends and estates will increase, pushing the top tax rate to 39.6 percent from 35 percent. The nonpartisan Congressional Budget Office says that would lead to a recession.

Business Leaders

Obama is enlisting business leaders to pressure Republicans as he seeks to extend George W. Bush-era tax cuts while letting them expire for individual income of more than $200,000 a year and couples’ income over $250,000.

The president met at the White House yesterday with corporate leaders, including Mike Duke, president of Wal-Mart Stores Inc. (WMT:US) Duke said in a statement afterward that it is crucial for Obama and Congress to reach an agreement to restore consumer confidence and help businesses.

Wal-Mart shoppers’ confidence “is still very fragile,” Duke said. “They are shopping for Christmas now and they don’t need uncertainty over a tax increase.”

Honeywell International Inc. (HON:US) Chief Executive Officer David Cote said most of the executives “came away encouraged” the president realizes a deal must be struck or the economic recovery will be at risk. Corporate leaders accept that some higher taxes will be part of any plan to bring down the debt, he said.

Tough Tone

At his news conference, Obama took a tough tone with Republicans, saying his Nov. 6 re-election gave him “a mandate to help middle-class families.” He threatened to allow all of the Bush-era tax cuts to expire if Congress shows “too much stubbornness” and won’t extend the tax cuts only for income up to $200,000 for individuals and $250,000 for couples.

Obama will meet tomorrow with congressional leaders, his first attempt to revive debt negotiations with Republicans since talks with House Speaker John Boehner broke down in mid-2011.

Yesterday, Boehner of Ohio said the Republican-run House “will be the last line of defense in Washington” against a “government that spends too much, taxes too much and borrows too much when left to its own devices.”

Obama was re-elected after pledging to raise taxes on the wealthy, a central theme of his campaign. In contrast, after Bush’s 2004 re-election he claimed a mandate to overhaul Social Security -- an attempt that failed -- after hardly discussing the issue in his campaign.

Democratic Gains

Democrats’ election gains in the House and Senate and the expiring tax rates may strengthen Obama’s hand. Democrats picked up two Senate seats to bolster their majority, and will gain seven or eight House seats while remaining in that chamber’s minority.

A majority of Americans -- 53 percent -- would blame Republicans if Obama and Congress don’t agree to avoid the fiscal cliff, according to a poll released Nov. 13 by the Pew Research Center and the Washington Post.

The spending cuts were mandated by a 2011 deal to increase the nation’s debt limit. Half of the $100 billion in automatic cuts set to begin taking effect in January would target Pentagon programs that Republicans historically defend. The plan exempts many of the social programs that Democrats care most about, such as Medicaid.

‘Good Position’

Regardless of the election results, Obama “had them in a pretty good position,” said Julian Zelizer, professor of history and public affairs at Princeton University in New Jersey. He said Obama’s leverage is likely to diminish over time, and if a debt framework isn’t reached by year’s end the tables may turn on the White House.

As early as February, the nation will need to increase its borrowing limit, an event that put Obama in a weakened position in 2011 as some Republicans threatened to let the nation default.

The Standard & Poor (SPX)’s 500 Index has fallen about 5 percent since Election Day set up the budget showdown between Obama and Republicans in Congress. The benchmark gauge is trading below its average price from the past 200 days, and has pared its 2012 gain to about 8 percent. It tumbled 1.4 percent to 1,355.49 yesterday, closing at the lowest level since July.

Treasuries 10-year note yields traded close to two-month lows, dropping to 1.59 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices.

U.S. Deficit

The U.S. will run deficits exceeding $1 trillion throughout Obama’s term amid stimulus spending and lower tax receipts as a result of the 18-month recession that ended in June 2009. Total federal debt has grown to $16 trillion from $10 trillion in the third quarter of 2008.

The Internal Revenue Service said this week there would be “serious repercussions” for the 2013 tax filing season starting in January if Congress doesn’t address issues that affect 2012 tax returns.

Obama’s strategy is a change from his prior negotiating style, said Joel Friedman, a former deputy staff director for Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.

“Public pressure seems to be part of the game plan whereas last time it was done all in private, behind closed doors,” Friedman said. “There were stretches where no one even knew” the administration was negotiating.

Boehner has crafted a public image of consensus-seeking.

‘No Barriers’

“There are no barriers here to sitting down and beginning to work through this process,” Boehner told reporters yesterday. “Nobody underestimates the difficulty that faces us.” He said a “spirit of cooperation” over the last week created an atmosphere where “I remain optimistic.”

Obama would share the blame for a recession caused by a failure to reach agreement, Republicans say.

Raising marginal tax rates on the top 2 percent of taxpayers will cost hundreds of thousands of jobs, said Representative Pete Sessions, a Texas Republican.

Obama sought to position himself as a voice of moderation and bipartisanship.

“I don’t presume that because I won an election that everybody suddenly agrees with me on everything,” Obama said. “I’m more than familiar with all the literature about presidential overreach in second terms.”

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

To contact the editor responsible for this story: Jodi Schneider at Jschneider50@bloomberg.net


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Companies Mentioned

  • WMT
    (Wal-Mart Stores Inc)
    • $76.04 USD
    • -0.20
    • -0.26%
  • HON
    (Honeywell International Inc)
    • $96.1 USD
    • 0.56
    • 0.58%
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