CNBC: The Mayans may not be right about the world ending by the end of 2012, but the next month and a half is looking a lot more panic-stricken than celebratory. The ongoing fight over the “fiscal cliff” may overshadow everything else as we get closer to the new year. Sadly, compromise seems hard to come by, even though the consequences of going over the cliff — hundreds of billions of dollars of spending programs that are set to expire, along with the largest tax increase since World War II for virtually all income levels — was specifically designed to force compromise.
It seems Washington underestimated its own dysfunction. President Barack Obama has been very clear in his mission and at last check seemed to be digging in on his goal to raise tax rates on only the highest earners.
Those earners, of course, are designated by the White House as individuals making an annual salary of $200,000, or couples bringing in $250,000. At his Wednesday news conference, the president made clear he wants to raise their rates and close loopholes. This conflicts with recommendations from his own bi-partisan debt commission, led by former Republican Sen. Alan Simpson and respected Democrat Erskine Bowles, which advocates a simpler tax code with fewer deductions but lower rates. So the market has been nervous over the unknowns of where tax rates will be in 2013, and has sold off since Election Day in anticipation of much higher capital gains and dividend taxes. Much of the discussion over the last few weeks has been about broadening the base of taxpayers by eliminating loopholes and exemptions.
Sources tell me, if done right, this would far exceed the revenues a tax “rate” hike would generate. But even if you do raise rates on top earners and limit deductions, that barely moves the needle on our national debt and deficit. Entitlement spending is the main issue, yet so far there has been no discussion of spending cuts. The president has been meeting with labor leaders and CEOs to discuss how to avert the fiscal cliff. Most economists say failure to do so is the surest way to drive the U.S. back into a recession in 2013. Yet we do not appear close to a compromise solution. Republican Speaker John Boehner has said he is open to more tax revenue, but not via higher tax rates. He wants to close loopholes.
The president continues to reiterate what he had been saying throughout the campaign — that he will veto any deal that does not raise rates on upper-income taxpayers. This would take the current federal tax rate of 35 percent to close to 39.6 percent. Now there are reports that President Obama is looking for additional tax revenues of $1.6 trillion over the next decade, or double what he had proposed last year during the painful talks over extending the debt ceiling with Republicans.