Members of Congress and the White House have begun to hold more serious talks on the fiscal cliff (actually, fiscal slope is the better term for it, as the fiscal contraction does not all hit right away). Predictably, the talks are focusing on Bush tax cuts, even though the automatic spending cuts and the payroll tax cut combine for a sharper impact, when you take into account the economic multiplier.
According to Politico, Treasury Secretary Tim Geithner met with Dave Camp, Chair of the House Ways and Means Committee, over the expiration of the tax cuts. Fed Chair Ben Bernanke and CBO Director Doug Elmendorf met with the Senate Finance Committee. Everyone’s talking in quiet rooms. Here are the rumors:
If the polls stay where they are today, and Republicans keep the House, Democrats hold the Senate and Obama wins the presidency, top aides in both parties insist that tax rates on the wealthy will go up. But those aides, who are involved in planning for the year-end battles, say the legislative gridlock could give both sides the incentive to strike a grand deficit and tax compromise.
On K Street, rumors are flying about what Congress will do during the lame-duck session after the election. Republicans in the House could use this month or meetings in coming weeks to unveil which business tax breaks — called “extenders” — they plan to fight for in the Tax Code, lobbyists say.
In the Senate, Majority Leader Harry Reid (D-Nev.) was preparing to ask Minority Leader Mitch McConnell (R-Ky.) to create a formal conference committee to negotiate tax rates.
There’s also talk, as there always is, about fundamental tax reform, but the fact that the “tax extenders” package, which is largely a series of expiring tax expenditures for corporations, what amounts to spending through the tax code, is in the mix of these discussions suggests that there will be no base-broadening tax reform, at least not in reality.
The split among the Democratic Party comes from whether to allow all the tax cuts to expire and then to come back with an “Obama tax cut” package in the new year, or whether to engage in a short-term extension of everything to pave the way for tax reform, or something in between. The only somewhat original idea comes from independent Senate hopeful Angus King, who would set a trigger tied to GDP growth or the unemployment rate for when the tax cuts – all of them, I think, not just the high-end ones – are allowed to expire. One quibble with this is the fact that tax cuts for the rich are in no way associated with economic growth, and so those cuts at the high end could probably be allowed to expire immediately. A trigger on the other tax cuts, to return us to a Clinton-era level of revenue which did nothing to slow down that economy, sounds like a decent idea because a broad-based snapback of fiscal policy would affect the recovery.
You see far less understanding about how Congress will look to handle just as critical issues around Medicare reimbursement rates and the automatic sequester cuts to defense and discretionary spending and even extended unemployment benefits. But this is all post-election fodder, anyway.