The President entered the debt talks yesterday, meeting with the leaders of both parties in the Senate. And we’re starting to get some numbers out of the negotiations.
The “down payment” of deficit reduction is expected to be anywhere from $2-$2.4 trillion, of which between $500 billion and $1 trillion has been agreed to. So there’s still a way to go. The talks led by Vice President Biden ended when Democrats raised $400 billion in increased revenues as their contribution. So that would be between a 4:1 and a 5:1 ratio between spending cuts and revenue increases. That $400 billion concerns mainly eliminating tax breaks for wealthy individuals and companies.
Among Democrats’ revenue proposals is a change to a common method for valuing businesses’ inventories called last-in-first-out, or LIFO.
Under this method, manufacturers can estimate the cost of the goods they’ve sold at their most recent market prices, even if they purchased the goods at lower prices. An oil company could value the oil it sells at roughly $100 a barrel, for example, rather than $80 a barrel as it may have cost several years earlier. Being able to calculate higher expenses makes a company’s taxable income smaller.
Democrats are proposing to increase the amount of income subject to tax, a move fiercely resisted by many businesses.
Another Democratic proposal would limit the itemized deductions that wealthier Americans can claim on their tax returns to a certain percent of their income. Depending on how strict the limit is, that could generate $300 billion more revenue over 10 years.
Democrats are also pushing to end oil company subsidies and ethanol tax breaks, though the ethanol subsidy is already scheduled to end this year.
The limitation on itemized deductions was floated last week with a higher threshold, on taxpayers making over $500,000 a year, than the previous offer of $250,000, which was in Obama’s first budget and the health care bill, at various points. So I think it would yield less than $300 billion. But anyway, the total revenue here would be $400 billion.
Reportedly, Democrats also want to close the carried interest loophole that allows investment fund managers to have their income taxed as capital gains. That’s roughly a $20 billion loophole.
Mitch McConnell, prior to his meeting with the White House, adamantly rejected any talk of revenue increases, even at this relatively minor 5:1 ratio. In yesterday’s Filibernie, Bernie Sanders called for a 1:1 ratio. “It is time for the president to stand with the millions who have lost their jobs, homes, and life savings, instead of the millionaires, who in many cases, have never had it so good,” he said on the Senate floor.
The $2 trillion “down payment” is only half of the deal. The other half would come in the form of triggers, that would kick in down the road with automatic cuts (or possibly automatic tax increases, it’s not clear) if the budget doesn’t get to primary balance by 2015.
One thing the deal will not include is the Bush tax cuts. That means they will have to be dealt with separately. As I’ve said repeatedly, allowing the Bush tax cuts to expire and doing nothing on a host of other scheduled issues brings the budget into balance all by itself. Gridlock is a more realizable and more sustainable plan than anything either side has come up with.
With Obama in the mix now, the concerns of House Democrats are very acute.
One Democrat who was there said Rep. Henry Waxman (D-Calif.) bluntly asked Obama whether he was willing to fight for Democratic priorities amid GOP calls for trillions of dollars in spending cuts.
In asking the question, Waxman said he’d asked several Republicans about their White House meeting the day before and had been concerned by their response.
“To a person, they said the president’s going to cave,” Waxman told Obama, according to his colleague’s account.
“If you’re not going to cave, eliminating that misunderstanding is very, very important to the negotiations,” the lawmaker said, retelling Waxman’s message. “And if you’re going to cave, tell us right now.”
Obama, however, “didn’t answer the question,” the Democrat added. “Obama got in a huff, and he said, ‘I’m the president of the United States, my words carry weight’ — which is not the answer,” the lawmaker said. “That’s not what anyone challenges. It’s whether he is doing this negotiation in the right way.”