In the context of doing a deficit reduction deal at all, this is an extremely strong bid that Tim Geithner delivered to John Boehner today. Now we know why Boehner whined and cried all afternoon. Let’s walk through it.
House Republicans said on Thursday that Treasury Secretary Timothy F. Geithner presented the House speaker, John A. Boehner, a detailed proposal to avert the year-end fiscal crisis with $1.6 trillion in tax increases over 10 years, an immediate new round of stimulus spending, home mortgage refinancing and a permanent end to Congressional control over statutory borrowing limits.
First, House Republicans leaked this because they’re mad about it. Second, the proposal includes:
• $1.6 trillion in tax increases: we already knew that. But just to back this up, Gene Sperling and Jason Furman posted at the White House blog today saying that tax deductions simply won’t get it done, and top marginal rates must go up.
• Immediate new stimulus: It’s actually more stimulus than was already proposed, and it represents almost the entire unpassed portion of the American Jobs Act, about $200 billion in immediate fiscal accommodation.
• Home mortgage refinancing: That’s basically the bill that would allow underwater homeowners whose loans aren’t owned by the GSEs to access the same ability to refinance as those with GSE loans. Though banks are making lots of money off HARP 2.0, and gouging their customers into higher loans than the market rate, homeowners are still saving money off of the refis relative to their current payments, and this is reaching the significantly underwater.
• An end to the statutory debt limit: Geithner called for a process where Congress could disapprove of increasing the debt limit but the President could veto that, making it essentially meaningless. Now that’s new, and it proposes simply ending the ability for Republicans to take the federal government hostage whenever they want to get long-held priorities. This is a great idea. The debt limit is stupid. The money has already been authorized by Congress and spent.
There’s more, however:
In exchange for locking in the $1.6 trillion in added revenues, President Obama embraced $400 billion in savings from Medicare and other entitlements, to be worked out next year, with no guarantees.
He did propose some upfront cuts in programs like farm price supports, but did not specify an amount or any details. And senior Republican aides familiar with the offer said those initial spending cuts might well be outnumbered by upfront spending increases, including at least $50 billion in infrastructure spending, mortgage relief, an extension of unemployment insurance and a deferral of automatic cuts to physician reimbursements under Medicare.
The spending cuts are pretty minimal. The proposal counts previously passed spending cuts at $1.2 trillion (Republicans dispute this and call it $900 billion) into the $4 trillion in overall deficit reduction. It also counts the accounting trick of war funding savings from the drawdown in Iraq and Afghanistan. When you put that together with the $1.6 trillion in tax hikes, you’re at only around $600 billion in total spending cuts in this round, $400 billion from health care programs, detailed in the FY2013 budget as mostly coming from provider cuts.
Plus, this calls for the extension of unemployment insurance AND the extension, for one year, of the payroll tax cut, and when you add that to the infrastructure spending and other stimulus (business tax breaks for hiring, R&D and equipment purchases), you get $200 billion or so in stimulus up front, maybe up to $300 billion once it all gets scored.
Moreover, the opening bid calls for much higher taxes on the rich than just from the tax rates:
The upfront tax increases in the proposal go beyond what Senate Democrats were able to pass earlier this year. Tax rates would go up for higher-income earners, as in the Senate bill, but Mr. Obama wants their dividends to be taxed as ordinary income, something the Senate did not approve. He also wants the estate tax to be levied at 45 percent on inheritances over $3.5 million, a step several Democratic senators balked at. The Senate bill made no changes to the estate tax, which currently taxes inheritances over $5 million at 35 percent.
So higher dividend taxes, AND a lower threshold and higher rate for the estate tax (though not back at the Clinton-era levels, somewhere in between) than contemplated by Senate Democrats.
I wouldn’t call this a “liberal” proposal. It all remains in the framework of a “down payment” that avoids the sequester, and the details on tax and social insurance program reform to come later. It doesn’t seek a top tax rate of 73% or a lowering of the retirement age. In the context of this silly fiscal deal that circumstances have conspired around, however, this is an extremely strong proposal. It has enough stimulus to fend off any fiscal drag in the near-term (and probably even provide a boost), it ends future hostage-taking events from the debt limit, and it derives most of the going-forward savings from taxes centered mostly on the wealthy. Obviously this is an opening bid, and Democrats won’t get all this in a negotiated process. But it’s in no way pre-compromised.
Concurrent with this, the Congressional Progressive Caucus decreed that they would absolutely not vote for anything with benefit cuts to Medicare, Medicaid or Social Security, with outside groups backing them up. Again, we’re at the early stages, but there’s no wobbling here yet.
Either the White House has learned that there’s no margin in pre-compromising, or they don’t believe that they will ever get to an actual deal with Republicans, so they might as well put out their optimal policy preference. Either way, they are definitely playing some political hardball so far.
Of course, it’s early. Let’s wait until dotting the I’s and crossing the T’s before a final assessment.
UPDATE: Just to make clear, Obama ran on virtually all of this, including the stimulus as part of passing the rest of the American Jobs Act and the refi proposal. The only really new thing here is the cancellation of the statutory debt limit. Everything else was a factor in the campaign. And Obama won that campaign.
Photo by the US Department of Labor, in the public domain.