Advertisement
Financial Planning

Obama's Plan for Averting the Fiscal Cliff

He could pull it off with higher taxes on businesses and the wealthy.

President Obama is making political hay with his vow to allow tax cuts for the wealthiest to expire as he jockeys for post position right out of the starting gate of fiscal-cliff budget talks with the GOP leadership.

Ideally, Obama is looking for about $4 trillion in deficit reduction over a decade through a combination of deep spending cuts and a hefty revenue stream that he says should include a long-shot hike in the top tax rate from 35% to 39.6%. That’s where the rate was before President George W. Bush slashed it a decade ago.

Advertisement - Article continues below

To achieve his aim, Obama must pony up himself, agreeing to give House Speaker John Boehner (R-OH) significant entitlement reforms, including adjustments to Social Security, Medicare and Medicaid.

The bartering isn't likely to be fully resolved during the lame-duck session of Congress set to stretch into mid- to late December. So the grand deal on fiscal-cliff issues won’t occur until next year. It'll be another punt, but not a permanent failure.

At stake is the state of the American economy: Economists warn that if the fiscal cliff is not avoided, the U.S. will sink back into recession next year, unemployment will rise and the financial markets will tumble.

Advertisement
Advertisement - Article continues below

Take a look at the biggest issues that make up the cliff:

-- A series of tax cuts and deductions worth $395 billion next year that have expired or are set to expire, including the Bush-era tax cuts and the reduction in the Social Security payroll tax.

Advertisement - Article continues below

-- The so-called sequester, with $65 billion in automatic spending cuts next year that will be triggered if action is not taken by the end of this year. The cuts would amount to $1.2 trillion over 10 years.

-- Raising the debt limit above the congressionally approved $16.39-trillion limit.

-- Extending emergency unemployment benefits, which could cost as much as $34 billion next year.

A temporary agreement is expected to come before the end of the year, with pledges to placate the markets and credit-rating agencies to avoid plunging over the cliff. It will include revival of a series of tax breaks that expired after 2011, chiefly a fix for the alternative minimum tax.

There are likely to be short-term extensions of all expiring tax cuts, buying time for a longer-term deal sometime in 2013, with a pledge to retroactively address the estate tax to restore favorable rates scheduled to end December 31.

Advertisement - Article continues below

Obama and Boehner also will have to sidestep the sequester deadline set for New Year's Eve, which triggers huge automatic defense cuts and automatic spending reductions. They'll agree to defer that action for at least a few months and perhaps up to a year, along with promising to raise the debt ceiling.

Advertisement
Advertisement - Article continues below

Then comes the hard part: closing the deal next year. It will happen as rancor yields to reason. When the alternative is another recession, Democrats and Republicans will find ways to compromise.

One way or another, businesses and the wealthy will pay more taxes. But despite his line in the sand, Obama might back down on higher tax rates for big earners. His victory gives him enough political capital to back the GOP into a corner with a threat of letting tax cuts for everyone expire, rather than just for high earners. But that might not sit well with lawmakers who have to run for reelection in 2014.

Advertisement - Article continues below

If he bends, he’ll want a lot in return, like an infrastructure bill and jobs package, along with a new extension of jobless benefits. Combined, these measures could cost hundreds of billions of dollars. In essence, it's another stimulus package, though the White House will try mightily not to call it that.

Obama will also work for immigration reform early next year, and he’s likely to get it. Republicans, fresh off Mitt Romney’s narrow losses in Colorado, Nevada and other battleground states where Hispanics voters turned out at historic levels, are wary of burning any more bridges with minorities, so they’re likely to go along.

There are more than 50.5 million Hispanics in the U.S., a 43% increase since 2000. That trend will remain in place, putting states such as Arizona and eventually Texas in play for Democrats. The president will think big: eliminating red tape for legal immigration, a path to citizenship for many illegal aliens, an expanded guest worker program, and swift citizenship for aliens who serve in the U.S. armed forces.

His position on immigration issues is far stronger than the Republicans’. He’ll either burnish his relationship with Hispanics by delivering on immigration reform or, if he fails, he'll surely remind the fastest-growing voting group that it was the Republicans who again blocked his try.

There is also room for bipartisan trade deals with Pacific Rim countries and the European Union.

There will be setbacks, of course, especially in the GOP-controlled House. Obama doesn’t have a mandate, but Mitt Romney’s defeat and the GOP’s failure to win a Senate majority will spur Boehner to engage in an ambitious bit of horse trading.

Boehner will have to corral his feisty tea party caucus, but it will happen this time. Unlike the failed grand bargain of 2011, this rodeo will be driven by the carrot, not the stick.

With reporting by Senior Political Editor David Morris and Senior Associate Editor Richard Sammon.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 2020

Recommended

20 IRS Audit Red Flags
tax returns

20 IRS Audit Red Flags

There's no sure way to avoid an IRS audit, but these red flags could increase your chances of drawing unwanted attention from the IRS.
July 1, 2020
10 IRS Audit Red Flags for Retirees
retirement

10 IRS Audit Red Flags for Retirees

Watch out: These things can increase the chances that the IRS will give your tax return a closer look.
July 1, 2020
10 Tax Breaks for the Middle Class
tax deductions

10 Tax Breaks for the Middle Class

Tax breaks aren't just for the rich. There are plenty of them that are only available to middle- and low-income Americans.
June 30, 2020
What to Do If You Get a Stimulus Check for a Deceased Person
taxes

What to Do If You Get a Stimulus Check for a Deceased Person

The IRS sent more than 1 million stimulus checks to dead people. If you received one for a family member who passed away, there are certain steps you …
June 25, 2020