Great Expectations for Cliff Deal by New Year’s

Yet another face-to-face bargaining session between President Obama and Republican House Speaker John Boehner on Monday fueled speculation that a budget and tax deal to avert the fiscal cliff may be at hand.

The 45-minute session at the White House marked the third conversation between the two leaders in the past five days and came after Boehner made two breakthrough concessions: One paves the way for raising tax rates on the wealthiest Americans, as the president has insisted, while the other would grant the Treasury additional borrowing authority next year without another partisan dust-up about raising the $16.4 trillion debt ceiling.

The New York Times reported that President Obama delivered a new plan in response to these concessions that includes raising revenues by $1.2 trillion over 10 years and keeping the Bush-era tax rates in place for households making less than $400,000. Obama is also insisting that debt-ceiling negotiations be tabled for two years, not the one year that Boehner offered.

The accommodations on both sides pave the way for a potential bargain before the end of the year.

Over a ten-year time frame, Boehner is seeking $1 trillion in new tax revenue, including an increase in tax rates on income of more than $1 million, and $1 trillion in spending cuts that includes major revisions to entitlement programs. Obama has now offered to cut spending by $1.22 trillion over ten years in exchange for $1.2 trillion in taxes over the same period. 

Previously Obama had previously asked for $1.4 trillion in new revenue, in part by raising the top rate on families making more than $250,000 a year, and $600 billion worth of spending cuts, notably $350 billion from health care programs but none from Social Security.

The Washington Post reported that Obama has also dropped his demand for the extension of a payroll tax holiday that has benefited virtually every worker for the past two years. But he is also seeking higher taxes on a larger swath of wealthy taxpayers than Boehner has accepted, including $50 billion in new spending on infrastructure, an extension of emergency unemployment benefits, and an increase  in the federal debt limit sufficient to delay any fight over the issue for two years.
 
While the two sides remain far apart, their differences have narrowed, signaling  the possibility of a “grand bargain” that both trims the deficit and averts a year-end “fiscal cliff” of roughly $600 billion in automatic tax increases and spending cuts capable of triggering another recession.

CAN HE SELL IT?
Speaker Boehner will face a critical test Tuesday morning, when he is expected to brief House Republicans on the latest details. He is not expected to bring any deal up for a vote unless a majority of the House's 241 Republicans support it, according to Reuters. 

Obama has signaled a major change to entitlement spending that might help Boehner sell the plan to House Republicans, who want to lower entitlement costs by tweaking the formula for inflation. Using a more realistic measure of inflation known as the Chained CPI, the government could reduce a host of federal programs, including Medicare and Social Security and save $217 billion over a decade.

Jared Bernstein, a former economics adviser to Vice President Joe Biden, told The Fiscal Times Monday that many progressive Democrats would support a chained CPI as long as provisions exist to protect the poorest of Social Security recipients from cuts.

“There’s recognition among some progressives that it’s a more accurate price index, but at the same time it would hurt the most vulnerable beneficiaries,” Bernstein said.

Joe Minarik, a former congressional and White House budget expert, noted that the chained CPI has the added virtue of both slowing the growth rate of entitlement spending and raising revenue, because a lower inflation rate limits increases in tax exemptions and   deductions.

“If you decide you need a down payment this year on deficit reduction, the nice thing about chained CPI is that both parties have to give at the office,” said Minarik, now the senior vice president and director of research at the Committee for Economic Development.

GROWING OPTIMISM NOW
The stepped-up pace of the talks has prompted growing optimism that a deal can be reached soon. “I think after weeks, if not months, of pessimism, it looks like we’re moving toward a deal,” said Jim Manley, the former press secretary for Senate Majority Leader Harry Reid, D-Nev. “It’s better than 50-50 . . . . Once Boehner agreed to a rate increase, you had the makings of something to work with.”

Republicans initially resisted any rate increase, a move the administration – which wants to preserve the existing low tax rates for 98 percent of the country – regarded as pandering to millionaires. Siding with the wealthy has been a surefire loser for the GOP.

Multiple surveys have shown broad support, even among some Republicans, for raising taxes as Obama has proposed on the top two percent of earners. The Pew Research Center reported in August that 58 percent of the country believed the rich paid “too little” in taxes. Only a third of Republicans considered wealthy Americans to be paying too much in taxes in that survey. But when the question was asked again by Pew this month connected to deficit reduction, 52 percent of Republicans approved of higher taxes on those earning more than $250,000.

Ron Bonjean, a former Republican congressional spokesman and adviser, said, “A limited deal is more likely between Christmas and New Year’s at this point, but the devil is in the details and there hasn’t been an overall agreement.”

Former CBO director Robert D. Reischauer said that, at most, the two sides will thrash out a few of the more contentious spending and tax revenue issues, while leaving the heavy lifting of reforming the entitlement system and tax code to next year. Noting that Republican and Democratic leaders have faced numerous problems in rallying their rank and file behind previous budget deals, Reischauer said ,“You need followership as well as leadership, and there are strong elements in both parties who will be reluctant” to go along with any agreement.