Fiscal cliff: Politicians playing chicken with the economic future

CHICAGO, Dec. 2 (UPI) -- U.S. President Barack Obama and congressional Republicans apparently are engaged in another game of chicken, one that will affect every taxpayer and could send the economy back into recession.

With the first of the year less than a month away, negotiators have reported little progress in averting the "fiscal cliff," that confluence of tax increases and spending cuts Congress imposed 18 months ago with the promise it would do something to avert them in plenty of time. Democrats keep insisting they're still optimistic a deal can be struck by Christmas; Republicans, not so much.

Bush-era tax cuts are on schedule to expire Jan. 1 and draconian spending cuts, especially those involving defense, are poised to kick in -- a one-two punch Federal Reserve Board Chairman Ben Bernanke said last month would provide "a fiscal shock ... that ... would send the economy toppling back into recession."

Obama's position has remained constant: Raise taxes $1 for every $2.50 in spending cuts. The easiest way to do that is to allow the Bush-era tax cuts to expire for incomes above $250,000, going from the current 35 percent to the 39.6 percent in effect when Bill Clinton was president, a time when the economy experienced its longest peace-time expansion.

Obama spokesman Jay Carney said that's the president's opening volley, that he's flexible as long as the math works out.

"The president has been very clear about his proposal and the revenues that would be part of that proposal that would result from and flow from extending tax cuts to the middle class and allowing rates to go back up to the Clinton levels for top earners, and then ... coupled with other changes that would produce additional revenue -- changes to the tax code on capping deductions and closing loopholes for top earners," Carney told a news briefing last week.

"We haven't seen any kind of proposal from the Republicans on rates -- there has not even been an acknowledgement from Republican leaders of the fundamental fact that rates have to go up."

Treasury Secretary Timothy Geithner made the rounds on Capitol Hill Thursday, presenting a package calling for a $1.6 trillion tax increase, a $50 billion economic-stimulus program and executive power to raise the federal debt limit without congressional approval. The package immediately was rejected by Republican leaders.

Obama also has proposed capping itemized deductions for the wealthiest at 28 percent of gross income, compared with the 35 percent currently allowed.

The key, the administration says, is not to hurt the middle class further.

"The president will not sign any legislation that extends the Bush-era tax cuts for top earners in this country," Carney said repeatedly during the week.

"This should not be news to anyone on Capitol Hill. It is certainly not news to anyone in America who was not in a coma during the campaign season because this was an explicit, repeated and high-profile debate throughout the campaign."

"I've got to tell you, I'm disappointed in where we are and disappointed in what's happened over the last several weeks," said House Speaker John Boehner, R-Ohio, who called on Obama to propose more spending cuts.

Republicans say they don't want to hurt the middle class either, nor do they want to raise taxes on the 2 percent of Americans who earn more than $250,000 annually. The top 1 percent of taxpayers -- those earning more than $350,000 a year -- already pay 37 percent of all taxes. The next tier, the 2 percent to 5 percent of taxpayers earning $150,000 to $350,000, pay 22 percent of taxes, Heritage Foundation figures indicate. Republicans have said they're open to maybe limiting deductions and closing loopholes.

The trouble is one person's loophole is another person's needed economic stimulus.

Among the ideas floated in the last few weeks is to eliminate -- or at least pare -- the mortgage interest deduction, which likely will cost the federal coffers $100 billion by 2014.

National Association of Realtors Chief Executive Officer Jerry Howard warned last week eliminating the mortgage interest deduction would send the just-recovering housing industry, which is beginning to show signs of life, back into free fall. The deduction is among the oldest breaks in the U.S. tax code and benefits mainly middle class families. The Tax Policy Center estimates those earning more than $250,000 a year get a $5,460 break from it, compared to just $91 for those earning less than $40,000.

What Republicans really have their eyes on is entitlement spending, which comprises 62 percent of the federal budget. Predictably, Democrats say no way, not as part of the "fiscal cliff" negotiations, although they acknowledge both Social Security and Medicare need to be tweaked to remain solvent.

"If we simply stand by and say 'don't touch Medicare in any way, for any reason, ever,' we are inviting a crisis that opponents can exploit to eviscerate Medicare or even to end it," Senate Democratic Whip Dick Durbin, D-Ill., said last week. "We must accept meaningful reforms that lead to better healthcare at lower costs -- not just for our public health programs, but for our entire health care system."

And as Clinton said during the campaign, it's all arithmetic.

Obama last week mounted a campaign-like push to get the public behind his position to pressure lawmakers, urging people to post on Twitter using the hashtag "#My2K," a reference to the average $2,000 taxes would go up for the middle class if nothing is done.

Friday, he went to Hatfield, Pa., to rally support, a trip ridiculed by Boehner, who likened it to a "victory lap" and said what is really needed from the White House now is not gloating but "leadership."

Meanwhile, Senate Minority Leader Mitch McConnell, R-Ky., who has said he would be OK with capping deductions, accused the administration of backtracking.

"Today [Thursday] they took a step backward, moving away from consensus and significantly closer to the cliff, delaying again the real, balanced solution that this crisis requires," he said following his meeting with White House lobbyist Rob Nabors and Geithner, the point man in the talks. "This is a real problem. Every day they delay brings us one step closer to the fiscal cliff that we simply must avoid."

Financier Warren Buffett told CNBC last week he doesn't expect a deal to be reached before the first of the year although he expects one to be reached eventually.

Buffett, in a New York Times op-ed, proposed raising taxes on incomes of more than $500,000, keeping federal revenue to 18.5 percent of gross domestic product and limiting federal spending to 21 percent of GDP -- a plan he acknowledges does nothing to reduce the national debt but one that would see the deficit diminish over time. Currently, government spending is at 24 percent of GDP.

"I have seen Washington and they don't want to negotiate in public, obviously," Buffett said. "So you're not going to hear people come on -- you're not going to hear Democrats talk a lot about what expenditures they're willing to cut. ...

"You're not going to hear Republicans talk a lot about what revenues they'll increase. But ... it's probably a good thing because then you get stuck in those positions and your ego gets involved and your constituents say, 'Well, you said this and why did you back off?' and all that. But in private, they will -- they will -- in my view, they'll get to something like that, but it may not be by Dec. 31."