Bloomberg News

Obama-Boehner Talks Stuck on Refusal to Move on Budgets

December 10, 2012

President Barack Obama and House Speaker John Boehner have three weeks to resolve their differences before more than $600 billion of spending cuts and tax increases start taking effect.

Here are questions and answers on what the fiscal dispute is about and what each side is demanding in the talks:

What’s the latest in the negotiations?

Obama and Boehner, an Ohio Republican, met privately at the White House yesterday. Representatives for both men issued identical statements that provided no details and said that “the lines of communication remain open.” Publicly, they still disagree on taxes, spending and the debt ceiling. Boehner said Dec. 7, before his meeting with Obama, that he had “no progress to report.”

Are there any signs of progress toward an agreement?

A few. In the past week, more Republicans, including Senator Bob Corker of Tennessee, have said they would be willing to allow tax rates to increase for top earners, meeting Obama’s demand. Boehner and White House Press Secretary Jay Carney each didn’t answer directly late last week about the possibility of setting the top rate between the 35 percent Boehner wants and the 39.6 percent level Obama seeks.

Boehner later issued a statement saying his opposition to rate increases “has not changed.” Democrats, including Senator Charles Schumer of New York, say they’ll talk about spending cuts after Republicans concede on tax rates.

Who created this situation?

Congress and Obama did. In 2010, they extended the George W. Bush-era tax cuts for two years, meaning that tax breaks on income, capital gains, dividends and estates will lapse at the end of this year. In 2011, as part of a deal to raise the U.S. debt ceiling, they set up $1.2 trillion in spending cuts to occur over nine years, starting in January 2013.

In 2012, they extended a two-percentage-point reduction in the payroll tax through Dec. 31. That confluence of events, known as the fiscal cliff, and the possibility of a recession caused by inaction are designed to pressure Congress to act on taxes, spending and the budget deficit.

If the fiscal changes are so bad, why can’t Congress stop them?

It can. Lawmakers want to. They disagree on how to do it. All sides want to continue the tax breaks on income of individuals up to $200,000 a year and married couples’ income up to $250,000 a year. Republicans, who control the House of Representatives and oppose tax-rate increases, see the tax-and- spending changes as leverage to push Obama to cut spending on programs such as Medicare and Medicaid. Democrats, who control the Senate, favor higher tax rates for top earners and fewer cuts in social programs and entitlement spending.

Doing nothing would reduce the deficit. What’s wrong with that?

The worry, lawmakers say, is that the combination of tax increases and spending cuts would reduce the deficit too quickly and spur a recession. They’re trying to replace the short-term deficit reduction scheduled for 2013 with more gradual changes over the next decade.

What have Republicans offered?

Boehner announced a $2.2 trillion proposal Dec. 3 that called for $800 billion in new revenue through a rate-lowering, base-broadening overhaul of the U.S. tax code. He would reduce entitlement spending by $900 billion and other spending by $300 billion. He would save $200 billion by changing a government inflation measure that would affect tax brackets and slow increases in Social Security benefits.

Are Republican leaders proposing an $800 billion tax increase?

Yes. Republican aides said the $800 billion revenue increase would be scored conventionally, which means that it wouldn’t rely on economic growth caused by the tax plan itself. They haven’t provided details about what tax breaks would be curbed. Obama and congressional scorekeepers would define that as a tax increase. Previous Republican proposals have relied on fees and other non-tax ways of raising revenue.

What does Obama want?

The president wants $1.6 trillion in tax increases over the next decade. He has proposed $600 billion in spending cuts, about $350 billion of which would come from health-care programs. He also counts the $1 trillion in spending cuts Congress passed in 2011, $800 billion in savings from winding down the wars in Iraq and Afghanistan and $600 billion in interest savings, according to senior administration officials. Leaving aside the administration’s call for measures to boost short-term economic growth, which could take the form of tax cuts or spending increases, this would result in $2.4 trillion in spending cuts and $1.6 trillion in higher taxes.

What’s the $1.6 trillion in taxes Obama is talking about?

The administration’s plans call for a two-stage tax increase that would raise taxes by $1.6 trillion over 10 years. Right now, they want to let the 2001 and 2003 tax cuts expire for top earners. That would push the top tax rate on capital gains to 23.8 percent, the top rate on ordinary income to 39.6 percent and the top rate on dividends to 43.4 percent. The plan would reinstate limits on personal exemptions and deductions.

What comes in stage two?

By Aug. 1, the administration wants Congress to pass a plan that would enact the rest of the administration’s tax agenda -- about $600 billion in higher taxes. What the administration has proposed in its budget beyond the immediate rate increases is about $1 trillion in tax increases and about $360 billion in tax cuts. That’s a net tax increase of more than $600 billion.

Some of the increases would make it more difficult for U.S.-based companies to defer taxes on income earned overseas. The cuts include a permanent extension of a tuition tax credit and the credit for corporate research. The biggest increase would reduce the value of top earners’ tax breaks by requiring them to take such breaks as if they paid taxes in the 28 percent bracket.

Will taxes really rise by $1.6 trillion?

It’s doubtful. Obama’s plans include taxing dividends as ordinary income and higher estate taxes. Senate Democrats didn’t endorse the president’s version earlier this year when they passed a bill extending most of the tax cuts.

Why is Obama insisting on a tax rate increase?

He says that’s the only way to get the amount of revenue he wants without affecting 98 percent of taxpayers or hurting charities. Obama’s budget, though, includes more than $750 billion in limits on tax breaks, and there are other ways to further broaden the tax base without raising rates that he hasn’t proposed.

“We are not going to simply cut our way to prosperity or to cut our way out of this deficit problem that we have,” he said in a Bloomberg Television interview Dec. 4. “We’re going to need more revenues. And in order to do that, that starts with higher rates.”

What’s included in Obama’s spending cuts?

The biggest item in Obama’s $350 billion in Medicare and Medicaid cuts would save $137 billion by requiring drugmakers to provide Medicare with the same rebates as they provide for low- income Medicaid patients. Obama would save an additional $45 billion by cutting reimbursements for post-acute care, such as rehabilitation hospital services and home-health calls for recovering surgical patients.

What do Republicans want on spending?

Ideally, they want the plan advanced by House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, to provide subsidies to Medicare patients to buy private insurance, and turn Medicaid over to states by providing them with block grants. In the future, Congress would designate a set amount for an individual’s coverage, which over time could fall behind the pace of rising health costs, meaning more out-of-pocket expenses for beneficiaries. Short of that, Republicans have talked about ideas such as raising the Medicare eligibility age.

What else might Democrats accept on spending?

Senator Dick Durbin, an Illinois Democrat, said he might reluctantly support a proposal to charge high-income seniors more money for Medicare.

“We’d have to have some specific down payments now, recognizing that we would then have to continue to work to see if we can come up with even better ideas to reduce health care costs over the long term,” Obama said in the Bloomberg interview.

Would both parties cut the deficit by the same amount?

They are close. Measured by the same yardstick, Obama wants $2.2 trillion of deficit reduction and $200 billion of stimulus spending. Republicans want $2.2 trillion of deficit reduction. Those come on top of the $2.4 trillion from already enacted cuts, war savings and interest savings.

Is the debt ceiling part of the negotiations?

Yes. The U.S. will reach the $16.4 trillion debt ceiling this year, and Treasury can use so-called extraordinary measures to extend the deadline until at least mid-February, according to the Congressional Budget Office. Republicans say they want spending cuts equal to the size of a debt-limit increase. The administration wants to remove the requirement that Congress pass future increases.

Why does Obama want to change the rules on debt-limit votes?

In 2011, the U.S. came within days of default because Congress wouldn’t raise the ceiling without spending cuts. Treasury Secretary Timothy F. Geithner says Congress shouldn’t be able to use the debt limit as a political weapon, especially because the borrowing pays for past decisions of Congress and the administration.

Is Congress really going to allow that?

It’s unlikely. Republicans in the House and Senate see the debt limit as their leverage to force the administration to cut spending.

Does anything have to happen before Dec. 31?

The alternative minimum tax, a parallel tax system created to ensure that wealthy individuals couldn’t use loopholes to avoid taxes, is scheduled to affect about 28 additional million households for tax year 2012, up from about 4 million otherwise. Without legislation to prevent that, the Internal Revenue Service has said it would delay tax filing scheduled to start in January until at least late March for more than 60 million filers. Action isn’t required, though the consequences of inaction would be quick and severe.

Who would see the brunt of failure to address the AMT?

Because the AMT claws back the benefit of the state and local tax deduction, it disproportionately affects people in high-tax states. If Congress does nothing, about half of New Jersey households would pay the AMT, up from 6.4 percent in 2010.

What happens if the U.S. goes “over” the cliff?

The Congressional Budget Office projects that the economy would go into recession in the first half of 2013 if the tax increases and spending cuts occur and aren’t retroactively resolved.

How will markets react if no agreement is reached by Jan. 1?

If history is a guide, stock markets have reacted negatively to past hiccups before recovering. The Standard & Poor’s 500 Index declined 0.5 percent in three minutes on Nov. 29, erasing an earlier rally, after Boehner said “no substantive progress” had been made toward a deal.

Bond markets gained last week on pessimistic news. The benchmark 10-year Treasury note yields rose less than one basis point, or 0.01 percentage point, to 1.62 percent last week, according to Bloomberg Bond Trader data. Today the yield was 1.60 percent, down two basis points, or 0.02 percentage point, at 8:39 a.m. New York time.

What is sequestration and how does it work?

Sequestration is the official name for the automatic spending cuts, half of which would be in defense programs. The cuts are across-the-board, giving agency officials little discretion on how to achieve them. Defense programs would face a 9.4 percent cut and most other agencies would be cut by 8.2 percent, the administration said earlier this year.

Is it really a cliff or is it more of a slope?

A slope may be a better metaphor. Most of the effects -- the higher income tax rates and the spending cuts -- would occur gradually during 2013 and not deliver an immediate $600 billion economic shock.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

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


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