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Staking Out Positions in theFiscal Talks

RelatedTimes Topic: Federal Budget(The 'Fiscal Cliff')

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Demystifying the Fiscal Impasse That Is VexingWashingtonBy JACKIE CALMESPublished: November 15, 2012

Many Americans must be wondering: What is all this about a“fiscal cliff”? And why did it receive so little attention duringthe presidential campaign?

Well, it’s complicated — theso-called cliff, that is. And mostsolutions are politically painful. Ina rare show of bipartisanship, ormutual protection, both partiesducked the debate until after theelection. What follows is anattempt to demystify the issue,which President Obama and thelame-duck Congress now are struggling over, andwhich may occupy them right through the holidays.

Q. What is the fiscal cliff?

A. The term refers to more than $500 billion in taxincreases and across-the-board spending cutsscheduled to take effect after Jan. 1 — for fiscal year2013 alone — unless Mr. Obama and Republicansreach an alternative deficit-reduction deal. BenBernanke, the chairman of the Federal Reserve, whois not known for catchy phrases, coined themetaphor “fiscal cliff” last winter to warn of thedangerous yet avoidable drop-off ahead in thenation’s fiscal path. It stuck.

Q. If we go over this so-called cliff, what happens?

A. Taxes would rise for nearly every taxpayer and

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Negotiating the FederalBudget

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The ‘Fiscal Cliff,’ Explained - NYTimes.com http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-...

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Fiscal Cliff May Be FeltGradually, Analysts Say(October 10, 2012)

many businesses. Financing for most federalprograms, military and domestic, would be cut.Many economists say that while annual budget

deficits are too high, these new taxes and spending cuts would be too muchdeficit reduction, too suddenly, for a weak economy. More than $500 billionequals roughly 3 percent to 4 percent of gross domestic product. TheCongressional Budget Office has said the result would be a short recession,though some analysts say the measures could be managed so they do lessdamage. “Slope,” they argue, is a better metaphor than cliff.

Q. Exactly what tax increases are in store?

A. When a tax cut expires, the practical effect is a tax increase. And a slew of taxcuts — $400 billion for 2013 — expire on Dec. 31: All of the Bush-era ratereductions; smaller tax cuts that periodically expire for businesses andindividuals; and the 2-percentage-point cut in payroll taxes that Mr. Obamapushed in 2010, which increased an average worker’s take-home pay by about$1,000 a year.

Also, 28 million taxpayers — about one in five, all middle- to upper-income —would have to pay the alternative minimum tax in 2012, raising their taxesmore. That is because Congress has failed to pass an inflation adjustment, as itusually does, to restrict the number of taxpayers subject to the alternativeminimum largely to the affluent.

Q. What spending would be cut?

A. An emergency unemployment-compensation program is expiring, whichwould save $26 billion but end payments to millions of Americans who remainjobless and have exhausted state benefits. Medicare payments to doctors wouldbe reduced 27 percent, or $11 billion, because this year Congress has not passedthe usual so-called “doc fix” to block the cuts, which otherwise are required by a1990s cost-control law.

The biggest cut would be $65 billion, enacted across the board for most federalprograms over the last nine months of fiscal year 2013, from January throughSeptember. This cut, known as the sequester, was mandated by an August 2011budget deal between Mr. Obama and Congress that ended their standoff overraising the nation’s debt limit. In that deal, they agreed to reduce spending by $1trillion over 10 years and to identify an additional $1.2 trillion in savings byJanuary 2013. If they fail to agree on the second installment — as is the case sofar — the automatic cuts will kick in.

Q. Why did the parties create such a fiscal and economic threat?

A. It was part intentional, part coincidental.

The intentional: Since Ronald Reagan’s administration, with mixed results,presidents and Congresses have occasionally mandated a self-imposed futurecrisis to force themselves to agree on unpopular tax and spending actions. Inthat spirit, the idea behind the August 2011 deal was that Republicans would sogreatly fear the military cuts, and Democrats the domestic spending cuts, thatthey would negotiate a deficit-reduction alternative by the Jan. 1 deadline.

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The ‘Fiscal Cliff,’ Explained - NYTimes.com http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-...

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The coincidental: The measures from the 2011 deal are set to take effect at thesame time as the changes to jobless benefits, the alternative minimum taxadjustment and the Medicare “doc fix,” and the expiration of the Bush tax cuts— a confluence that the two parties did not fully expect back in August 2011. Thenation will also reach its debt ceiling in January, creating additional uncertainty.Accounting maneuvers by the Treasury Department could push that deadline toMarch, but Mr. Obama wants a debt-limit increase as part of any deal, addinganother item to the agenda.

Q. Can’t Democrats and Republicans agree on anything here?

A. They actually agree on a lot. Neither side favors the sequester, an expandedalternative minimum tax or Medicare cuts for doctors; the issue in preventingthose outcomes is where to find offsetting savings to avoid adding to annualdeficits. And both parties want to extend all of the Bush tax cuts for 98 percentof taxpayers — on income below $250,000 for couples and on income below$200,000 for individuals.

Their main disagreement is a familiar one: the Bush rates on income above that,for the top 2 percent of taxpayers. Mr. Obama campaigned against the rates in2008 and in 2012. In December 2010, when the Bush tax cuts originally were toexpire, Mr. Obama reluctantly agreed to extend all of them for two years inexchange for Republicans’ support for the temporary payroll tax cut andextended jobless aid. This time, he swears, is different.

Q. If the president extended all the Bush rates once, why wouldn’t he do so

again for the right concessions?

A. The economy was weaker in 2010, and so was Mr. Obama. Republicans hadjust triumphed in the midterm elections, taking control of the House. Now Mr.Obama is fresh off re-election, and Congressional Democrats have gained seats.He vows that he will not allow the top tax rate to stay at 35 percent; a return to39.6 percent would raise about $1 trillion over 10 years. Chastened Republicanshave suggested they would support higher revenues, but only from limiting taxdeductions for high-income taxpayers, not from higher rates. Mr. Obama hasnot ruled out a compromise that would limit deductions as well as setting thetop rate above 35 percent but below 39.6 percent.

Q. What now? Might they really reach an impasse?

A. No one knows. Despite market jitters about that outcome, Democrats suggestthat they are willing to let Jan. 1 come and go without resolution unlessRepublicans relent on the top rate. That could simply be bravado, to makeRepublicans blink. A Washington Post-Pew Research Center poll this weekfound that a majority of Americans would blame Republicans for failure.

Q. Is there a best-case outcome here?

A. Many budget experts and economists are hoping for a two-part deal. The firstpart would extend many of the tax cuts and repeal the automatic spending cutsto avert the changes scheduled after Jan. 1. But it would be contingent on thesecond part: a framework for reducing projected long-term deficits byoverhauling both the tax code — to raise revenues — and entitlement programs— chiefly Medicare and Medicaid, whose rising costs in an aging population are

The ‘Fiscal Cliff,’ Explained - NYTimes.com http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-...

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A version of this article appeared in print on November 16, 2012, on page A20 of the New York edition withthe headline: Demystifying the Fiscal Impasse That Is Vexing Washington.

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unsustainable. Those overhauls would preoccupy Mr. Obama and Congressthrough 2013 and perhaps 2014.

Such an agreement would set specific targets for new tax revenue and spendingcuts to reduce deficits by about $4 trillion over a decade, giving Congress andthe president more time to work out the details. If they failed to do so,presumably other automatic changes might be in store as an enforcement action— setting up yet another looming deadline.

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The ‘Fiscal Cliff,’ Explained - NYTimes.com http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-...

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