Obama Can Resolve Cliff by Backing His 2011 Plan
President Barack Obama has abandoned his Hawaii vacation, returning to Washington to try to prevent the economy from going off the so-called fiscal cliff — the combination of tax increases and spending cuts that will occur next Tuesday unless he signs a newly passed bill into law.
The president can succeed if he returns to his 2011 position of raising revenues without raising tax rates. The failure of House Republican Speaker John Boehner’s Plan B shows that Republican members, newly elected on a platform of keeping taxes low, are not going to go back on their promises to constituents and vote for increases in tax rates.
The stakes are high. For the low-income earners, federal individual income tax rates will go from 10% to 15%. A childless single person with adjusted gross income of $30,000 — about $20,000 in taxable income — will see her taxes rise from $2,000 to $3,000 a year.
For the highest earners, tax rates will go from 35% to 42%, including a new top rate of 39.6%, a new Affordable Care Act tax of 0.9%, and a limitation of the use of personal exemptions and itemized deductions by top earners. Tax rates on unearned income will go to 44% because of an additional Affordable Care Act tax on capital gains and dividends.
The sticking point in the negotiations: Republicans have offered to raise $800 billion in revenue over 10 years through eliminating deductions, but Obama insists on raising revenue through increases in tax rates.
The solution: Return to the 2011 version of Obama. Back then, the president was in favor of raising revenue through eliminating deductions. In a news conference on July 11, 2011, Obama declared,
"And what I’ve also said to Republicans is, if you don’t like [raising tax rates], then I’m happy to work with you on tax reform that could potentially lower everybody’s rates and broaden the base…. So I have bent over backwards to work with the Republicans to try to come up with a formulation that doesn’t require them to vote sometime in the next month to increase taxes." Read Obama’s remarks here.
Why is Obama V.2012 so different from Obama V.2011?
One reason is that the president has just been re-elected. He sees himself in a position of strength, with a mandate to raise taxes.
Another reason is that the president and his allies actually want the economy to go off the fiscal cliff. In that way, all taxes will rise, and Obama will negotiate with Congress as to which ones will go down.
As Sen. Patty Murray, a Washington Democrat, said in a speech at the Brookings Institution on July 16, 2012, "If the Bush tax cuts expire, every proposal will be a tax cut proposal." Read Murray’s remarks here.
Despite Murray’s comments, there are three aspects of the fiscal cliff that would be particularly damaging.
First, the alternative minimum tax will be fully effective for 2012 if Congress doesn’t pass a "patch," as it has in previous years. This means that 28 million upper- and middle-income Americans would owe $92 billion of extra taxes on their 2012 income. The current AMT exemption is $33,750 for single filers and $45,000 for married couples filing jointly, so you don’t have to make that much to be hit by the AMT.
Since it has been assumed the Congress would adjust the AMT, as it has in the past, these tax payments have not been withheld from wage and salary income. Come April 15, these taxpayers will owe an average of $3,286 in payments to the IRS on their 2012 income, according to my calculations. Most people just don’t have that kind of cash on hand.
Second, if Congress doesn’t act, the government’s reimbursements to physicians who treat patients on Medicare will be cut by 27%. One doctor I spoke to in suburban Maryland now gets 25% to 30% of his normal fee (before tax and overhead) from Medicare. After the cut, he would get 18% of his normal fee. Reducing reimbursement rates will lead more doctors to drop Medicare patients or refuse to accept new ones. The elderly will face more shortages of care, or will be required to pay more for medical services.
Third, the estate tax would rise without action by Congress. The exemption of $5 million now would fall to $1 million. The tax rate on estates valued in excess of the exemption, now 35%, would jump to 55%. If farmers and other small-business owners die in 2013, their farms or businesses, or parts of them, may have to be sold to pay the tax.
These are just three of the many examples of taxes that are scheduled to increase next year. These other taxes don’t receive the sound bites of the marginal income-tax rates, but the scheduled increase in these taxes will adversely affect millions of Americans.
Obama has been insisting on higher tax rates on the strength of having won an election in which he made taxing "the rich" a front-line issue. However, after Election Day, Boehner announced that House Republicans would accept "revenue increases," language that mirrored Obama’s in 2011.
Obama has come back from Hawaii to avoid the perception of figuratively fiddling while Rome burns — or, literally, playing golf while Americans face mayhem in their 2013 tax planning. He has many responsibilities as president, but surely seeking to avoid the fiscal cliff is one of them. He should consider a return to Obama V.2011.
This piece originally appeared in WSJ's MarketWatch
This piece originally appeared in WSJ's MarketWatch