John Boehner’s willingness to see tax rates rise at some level has kick-started negotiations over a deal to avert the fiscal slope. The President and the Speaker met today for 45 minutes, and the staffs for both sides are working on a deal. In a sign of how ridiculous our fiscal conversation has gotten, the rumored centerpiece of the deal on the spending side would concern a change to the calculation of the cost of living adjustment, which would reduce benefits for a number of cash-transfer programs, including Social Security, which has not contributed one penny to the deficit in its 75-year history. Yet this is the linchpin of a deficit deal.
Essentially we’re looking at a $2 trillion deal, with $1 trillion from taxes and $1 trillion from spending cuts. If you add that on to the $1.5 trillion in spending cuts already included in the debt limit deal, and the $1 trillion in war savings, you have a $4.5 trillion deal with a ratio of $3.50 in spending cuts for every $1 in tax increases.
Pushing the talks to a new stage, Speaker Boehner relented over the weekend on his opposition to any tax rate increases, and proposed that tax rates be allowed to go up on those making a million or more per year. In addition to new revenue from the wealthy, Boehner is also proposing closing some tax loopholes and limiting some deductions. As he has in previous offers, the speaker is also pushing for the White House to agree to change the way inflation is adjusted for federal benefits like Social Security.
The plan under discussion now also includes an increase in the debt limit for some period of time – potentially a year. But an aide to Boehner notes that this part of the agreement is contingent on the size of the spending cuts – the speaker remains committed to his rule that the cuts and reforms have to be greater than any increase in the debt ceiling.
So this deal would only raise the debt limit by $1 trillion – perpetuating the Boehner rule and allowing Republicans to once again take the full faith and credit of the US government hostage for spending cuts. It would incorporate Social Security benefit cuts even though that program doesn’t contribute to the deficit. According to Ezra Klein, it would lift the sequester on defense and discretionary spending, but only to replace it with ANOTHER sequester that would kick in if all the undecided spending cuts and tax reforms don’t get worked out by Congress. And it would extend unemployment benefits, the stimulus-era tax breaks for the middle class, and tack on maybe a little infrastructure, but would let the payroll tax cut, the most stimulative item on the table, expire.
Tax rates would only raise above $500,000, in all likelihood, with the rest of the revenue coming from deductions and loophole closures to be named later. The targeted spending cuts that would replace the sequester would be largely unnamed as well, and worked out through the committee process.
I’m pretty much on the record that a deal on the budget deficit when we need jobs is borderline criminal. THIS deal is definitely a comedown from the White House’s initial offer, and the cut to Social Security benefits makes no sense (chained CPI would also cut food stamps and veteran’s benefits; I’m sure our nation’s veterans will take that news in stride). What really makes it unacceptable is the extension of the debt limit for only one year, leaving it as a weapon that House Republicans can return to. Boehner would count only the spending cuts toward the debt limit increase and not the tax rises. And he would be well-positioned to do it again, having successfully navigated it twice.
Meanwhile, as a bottom line for the economy, there would be significant austerity here, particularly from the expiration of the payroll tax cut. It’s unclear when everything else would hit the economy, but that would immediately knock GDP down by 1% or so. A piddling amount on infrastructure won’t offset that.
Perhaps the only way that this will get stopped comes from the ferocious response from conservatives to what they describe as Boehner’s betrayal. If conservatives turn against the deal, and at least Democrats refuse to cut Social Security, there may not be enough votes for passage.
UPDATE: There’s no guarantee that chained CPI would also get applied to tax brackets, but if they do, that ends up being a regressive tax increase. There are less brackets at the top, to put it simply.