President Obama and congressional leaders need to act quickly to find a compromise on a deficit-reduction plan to avoid tax increases and budget cuts Jan. 1.
President Barack Obama and congressional leaders from both parties were on their best bipartisan behavior as they began closed-door talks Friday to avert going over the so-called "fiscal cliff" Jan. 1.
After the meeting, they said all the right things, the leaders pledging that negotiators would work through the Thanksgiving break to reach a deal.
But don't be fooled into thinking the crisis is over. Deep divisions remain, and it will be difficult to bridge them in the few weeks remaining before the end of the year delivers major damage to the country's economy — and your pocketbook.
If you're not sure what the fiscal cliff is or what effect it could have, you can be forgiven. It was not brought up much during the recent presidential campaign as both parties preferred to avoid the politically unpalatable topic until after the election. It's complicated, but here's a little background.
The fiscal cliff refers to a bundle of tax increases and budget cuts, totaling about $500 billion, that will take effect Jan. 1 unless negotiators reach a budget deal.
The crisis is at least in part manufactured. President Obama and Congress agreed on a deal to increase the debt limit in August 2011 and to cut spending by $1 trillion over 10 years. They also agreed to force themselves to find an additional $1.2 trillion in spending reductions by Jan. 1, 2013, or painful mandatory budget cuts would kick in, but they have not yet been able to agree on the additional spending reductions. Those cuts, known as a sequester, would total $65 billion and would be enacted in federal programs across the board for the last nine months of fiscal year 2013, which started Oct. 1.
Further complicating the issue, the Bush-era tax cuts passed in 2001 are set to expire Dec. 31, and while both parties agree that the cuts should be extended for most businesses and taxpayers, they have been diametrically opposed about those who earn over $250,000 a year. Obama and Democrats claim that wealthy taxpayers are not paying their fair share and want marginal tax rates for wealthy taxpayers to increase from 35 to 39.6 percent. Republicans have been dead set against raising tax rates on anyone, saying the increases would lead to more unemployment. They instead propose closing tax loopholes for the wealthy to raise revenues. Each side cites studies buttressing its position.
There's more: The 2 percentage point Social Security payroll tax cut is expiring; many more taxpayers will be subject to the alternative minimum tax and Medicare payments to doctors could be cut. All these are wrapped up in the negotiations.
The bottom line is that if no agreement is reached, you'll be paying more taxes come Jan. 1 — about $3,500 more for the average American household. Nearly 90 percent of Americans would see tax increases, and economists estimate that $500 billion taken out of the private sector would be enough to push the country back into a recession.
There are a growing number of Democrats who say we should go over the fiscal cliff rather than settle for smaller tax increases from the wealthy. For an elected official to say that is not only irresponsible, but it also shows the disconnect between our political class and the people they supposedly serve.
Political leaders need to make progress, and quickly, to reassure the business community, investors in the stock market and citizens that they will take their responsibilities seriously. There's nothing worse for businesses than uncertainty. There will be real market consequences if there's no agreement.
It seems inevitable that taxes will increase at least for the most wealthy, and polls show support from most Americans. So here's a suggestion. It's called compromise — it's the way things used to get done before this era of polarization. Raise tax rates on the wealthy, but at a lower rate than Democrats want, and close some tax loopholes as Republicans have suggested.
And let's be clear: Avoiding plunging off the fiscal cliff does not solve our country's mounting budgetary and debt problems, but it's a necessary first step. Economists estimate that about $4 trillion in spending cuts and new revenue to reduce deficits will be needed over the next decade to put the federal budget on stable footing.
That means starting next year, Congress and the president will have to start on the heavy lifting of tax reform, entitlement and welfare spending and other economic issues they have been loath to address. This is the price for decades of economic profligacy.