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What’s on the table in the budget talks?

The dynamics of the current budget discussion, the ones aimed at averting a fiscal cliff, are hard to follow. For instance, who is doing the negotiating?  And, having said that, will the legislative bodies some of the negotiators represent actually do their leaders’ bidding.

 At the moment, the back and forth is almost entirely between the President and the Speaker of the House.  The Senate is in Democratic hands and the House under Republican control. The thinking is that if the President and the Speaker can come to agreement, then an alternative deal, one to take the place of the fiscal cliff, can be worked out. But, maybe it’s not as easy as that.

There are two components to the fiscal cliff. The first is the automatic cuts in spending mandated by last year’s Budget Control Act. These automatic cuts were designed to be harsh in order to prod the deficit cutting super committee to reach an agreement. But that didn’t work. The super committee failed and the clock started ticking on the cuts, or as they’re called in the Capitol, in true Washington parlance, the “sequestration.” The total cuts in 2013 are $105 billion split evenly between defense and all other discretionary programs. The other component of the cliff is a series of temporary tax reductions that lapse at the end of the year. These include President Bush’s tax cuts for upper income brackets, as well as a cut in the payroll taxes (for Social Security) that was part of President Obama’s stimulus package.  

Most members of Congress want to avoid this severe combination of cuts and tax increases. But, not everyone thinks it’s all that bad.  Some Democrats for example, those who campaigned in favor of ending the Bush tax cuts, while nervous about the cuts in spending, would be happy if the tax bills lapsed. On the other hand, some Republicans, those who want to see the tax cuts renewed, don’t oppose the spending reductions in the Budget Control Act.  However, those who say they are happy to keep going down the current fiscal path are in a decided minority.

The proposals on the table are still at odds with one another. President Obama proposed a series of increases in the tax rates, and along with that, cuts in some spending programs. However, added to his proposal is a substantial increase in stimulus spending. The reaction from the House leadership was predictable. The GOP, arguably, in what is a more reasonable proposal, suggested increases in revenue through changes in various unspecified deductions and tax loopholes. As for spending, they targeted entitlement programs. This includes a cut in Medicare, by upping the eligibility age, and controlling growth in Social Security expenditures by changing the method for computing increases.  

Both of these proposals are a starting point, but from this point on, speculating on how a deal could be worked out gets more problematic. Finding a middle ground on spending cuts is one sticking point. The GOP wants changes in the entitlement programs, but Democrats are highly reluctant to touch any of these.  If the President and the Speaker came to some agreement on entitlement programs, while it might get the nod from House Republicans, it may have tougher going in the Democratic controlled Senate. Taxes offer some possibility, but it’s not clear the Republican emphasis on eliminating or reducing various deductions and credits will generate enough revenue.  And besides, Democrats want changes in the tax rates and that’s something Republicans definitely oppose. If the Speaker were to come to some sort of agreement with the President, that perhaps had a rate increase in it, in addition to plugging the loopholes, he could expect some fiery reaction from his caucus.

As the clock ticks on its possible that Congress, at some point late in the process, may decide to vote in favor of a temporary extension of the Budget Control Act and the current tax rates. The House and Senate leadership could decide that this is all too hard, that they need more time, and rather than find agreement, they will leave it up to the next Congress to solve. While appealing to some this might be the worst thing they could do.  

The President and the Congress don’t seem to understand the impact this debate, and the uncertainty it produces, is having on the economy. Small businesses, where taxes are often paid by the individual owner, need to know what their tax rate is going to be. And needless to say, if it goes up substantially, these businessmen aren’t going to be hiring that extra person or buying the new printer, router, pneumatic wrench or earth moving attachment they had in mind. At the same time, many large and small defense contractors face a similar uncertainty. If the Department of Defense is hit with major budget cuts, it’s likely that programs of all sorts will be cut.  

None of these alternatives are all that attractive, but, if we’re to address our spending problem, and yes, our tax problem too, then somebody, somewhere, has to give a little. And the sooner the better.

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