At the 11th Hour, Obama & Boehner Begin to Deal

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Late on Monday President Obama proposed allowing taxes to rise in 2013 only for families making over $400,000 in annual adjusted gross income, rather than his prior level of $250,000. Plus, he will support a change in indexing for some entitlement programs, reducing their cost over time.

In return, the president wants a two-year extension of the debt ceiling; additional spending on infrastructure; and unemployment benefits extended beyond the standard 26 weeks.

Obama's proposal came in response to Republican House Speaker John Boehner's Saturday offer of $1 trillion in tax increases and $1 trillion in spending reductions over the next decade, accompanied by a one-year increase in the debt ceiling.

Of the tax increases, $460 billion would come from allowing the Bush tax cuts to expire on January 1 for families with adjusted gross income of $1 million or more. Another $540 billion in tax increases would be decided by the next Congress by limiting deductions. That makes sense because curtailing deductions is intensely complex and cannot be dealt with sensibly in the remaining days of 2012.

In exchange, the Speaker wants a cut of $1 trillion in Social Security and Medicare, to be achieved by modifying the way these programs are indexed to inflation, and from raising the standard retirement age for Medicare, now 65, at some time in the future. Opposition to raising the Medicare eligibility age is already being heard from labor and liberals.

President Obama's proposed tax increases of $1.3 trillion over 10 years still exceed his suggested spending cuts of $930 billion, according to Boehner spokesman Michael Steel, and so would be unacceptable to Republicans.

Obama promised Americans a "balanced" approach to deficit reduction. Last week, speaking in Redford, Michigan, the president said, "I want us to bring down our deficits, but I want to do it in a balanced, responsible way."

Monday's offer marked Obama's first proposals on how to curtail entitlement spending. This may be both canny negotiating, saving the most significant concessions for last, and also postponing as long as possible a storm of protest from the Democratic left, which already believes Obama has not been tough enough.

To change the law of the land, the fiscal cliff, will take the coordinated efforts of both houses of Congress and the President.

Obama has many responsibilities as president, but surely seeking to avoid the fiscal cliff is one of them. It's not just the increases in income taxes and the sequestrations, namely the automatic spending cuts, that are at issue.

In addition, there are numerous aspects of the fiscal cliff that get little attention. Many would be particularly damaging, including the following three.

First, the alternative minimum tax will be fully effective for 2012 if Congress doesn't pass a "patch," as it has in previous years. This means that 28 million upper- and middle-income Americans would owe $92 billion of extra taxes on their 2012 income. Since it has been assumed the Congress would adjust the AMT, as it has in the past, these tax payments have not been withheld from wage and salary income. Come April 15, these taxpayers will owe an average of $3,286 in payments to the IRS on their 2012 income, according to my calculations.

Second, the federal government's reimbursements to physicians who treat patients on Medicare will be cut by 27 percent, if Congress doesn't act. Physicians already receive less than half of their normal fees for seeing Medicare patients. Reducing their rates by a further 27 percent will lead more doctors to drop Medicare patients or refuse to accept new ones. This would lead to a shortage of care for the elderly, or force them to pay more for doctors' care.

Third, the estate tax would rise without action by Congress. The exemption of $5 million now would fall to $1 million. The tax rate on estates valued in excess of the exemption, now 35 percent, would jump to 55 percent. If farmers and other small business owners die in 2013, their farms or businesses, or parts of them, may have to be sold to pay the tax.

Through inflation, many homes in major urban areas now are worth $1 million or more. With higher estate taxes, some homes might have to be sold when a family member dies-unless the family has employed estate lawyers to shelter assets from Uncle Sam.

These are just three of the many examples of taxes that are scheduled to increase next year. These other taxes don't receive the sound bites of the marginal income tax rates, but the scheduled increase in these taxes will adversely affect millions of Americans.

Obama has been insisting on higher taxes on the strength of having won an election in which he made taxing "the rich" a frontline issue. Boehner acknowledged as much when he announced the day after Election Day that House Republicans would accept "revenue increases." That language deliberately avoided "tax rates." But pressure has been building on the Speaker to go along with some rate increases so as to avoid the fiscal cliff.

What is in play now is where tax increases will start, presumably above $400,000 of adjusted gross income, and what the new rates will be. While Obama has called for rates above those in effect before the Bush tax cuts of 2001 and 2003, because of the new Medicare taxes in the Affordable Care Act, he might accept something less.

Also at issue is whether to raise the tax rates on long-term capital gains and dividends, now 15 percent. If Congress does not act, top rates on capital gains will rise to 24 percent and on dividends will rise to 43 percent.

But, just as Obama was reelected for a second term, House Republicans were reelected to a majority-albeit a smaller one. Whether Obama likes it or not, Boehner will be Speaker of the House for another two years. Tax bills by the constitution must originate in the House--not the Senate, much less the White House.

At the 11th hour, Obama has joined Boehner in negotiations on at least some of the tax and spending issues facing America. All of the decisions that need to be made to our tax code hardly seem possible in the next two weeks. It is better late than never, but now is very late.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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