Beneath a stagnant-looking surface, the current of fiscal negotiation in Washington, D.C., is moving in the expected direction - and maybe more swiftly than anyone expected.
Yesterday’s unexpected retirement by Sen. Jim DeMint, a conservative firebrand from South Carolina, is the strongest signal yet that Republican hardliners know they can’t hold back the tide of higher taxes sweeping across Capitol Hill. DeMint’s departure to head the Heritage Foundation, a conservative think tank, is an acknowledgment that the tactical battle has been lost for the time being. He seems to think that, in the long run, he can accomplish more to limit the scope and cost of government, and the share of national wealth it absorbs, from outside the legislative process than from within it.
Taxes on upper-income Americans are going to go up. In fact, they have gone up already in many states over the last several years. During the presidential campaign, Mitt Romney acknowledged that federal taxes would follow suit. House Speaker John Boehner put $800 billion in “revenue enhancements” on the table as part of the Republicans’ initial offer to President Obama in the current negotiations.
The question of whether taxes on the wealthy go up via higher tax rates, as Obama insists, or via new limits on deductions, as Republicans prefer, is not trivial - but it isn’t earthshakingly important, either, as Republicans are beginning to realize. Limiting deductions would do less damage to the economy because, all else being equal, higher rates create greater distortions - such as an incentive to give more money to charity rather than pay higher taxes to the government. This is why charities are already lobbying behind the scenes to prevent limits on the tax benefits on which their fundraising feeds.
But charitable contributions are voluntary, unlike taxes. Regardless of the mechanics of any tax increase, if the government takes more of your income and you want to spend the same amount on yourself, you can still cut back your philanthropy to make your personal ledger balance. Or you can cut back the amount you invest in expanding your business with new equipment or employees. In the short term, you maintain your personal resources, although it comes at a long-term cost to your own finances as well as to the nation’s.
I have argued for several years that when taxes go up for high earners, they ought to go up for the middle class as well - to underline the point that federal spending isn’t free, and to prevent today’s voters from dumping their costs on tomorrow’s taxpayers. Neither party, however, wants to see taxes rise on the 98 percent of households for whom Obama wants to maintain current rates. Those taxes would rise if current law is allowed to expire at the end of this year, but since neither party wants to see that happen, it won’t happen. Even if politicians miss the year-end deadline, they will make a continuation of lower rates retroactive to the beginning of 2013.
The real federal fiscal problem is one of spending, not taxes, and this is where the real conflict between the parties lies. Republicans want to spend less than Democrats do. They want to make more changes in entitlement programs than Democrats want. Again, the differences are not trivial, but in the scheme of things, they are not massive. Republicans mostly want to maintain a federal government that spends an enormous amount of money on defense, health care, Social Security and many other things. Democrats unanimously want a government that spends even more on those same things, except that some Democrats would spend less on defense.
Politicians know how to bridge those differences, and when the politicians engage fully, they will do exactly that.
One obstacle is that Obama has never been much of a politician. If you like him, you may see him as a leader, a visionary or a transcendent figure, a sort of Gandhi who can nail a jump shot. If you don’t like him, you may see a bully, a narcissist or the worst sort of lawyer, one who is fully prepared to trample the law (recall his recess appointments when the Senate was not in recess, or his treatment of Chrysler debt holders) for his own purposes. Either way, he is not someone with a history of forging legislative compromise.
He has less reason than ever to compromise now that he no longer needs to run for re-election. This explains why the president’s own initial offer calls tax increases twice as large as Republicans are proposing, as well as for $50 billion in new so-called “stimulus” spending (you scarcely heard him utter the word “stimulus” during the recent campaign, given the dismal results of his first-term spending binge), and why he has made no serious move on entitlement reform. It is also why he demands a unilateral congressional disarmament on the federal debt limit, which is where Republicans have their greatest remaining leverage. Rather than require approval of ever-higher federal borrowing, Obama would treat every dollar borrowed as pre-authorized unless Congress mustered a supermajority to stop it. The result, like it or not, would be Obama unlimited.
There was a time when Obama himself didn’t like it. As a senator in 2006, he voted against a debt ceiling increase, but that vote came when Republican George W. Bush was in the White House.
It might make more sense for House Republicans to refrain from negotiating with the White House at all. After all, any legislation that reaches Obama’s desk has to clear the Senate as well as the House. Senate Democrats generally agree with the president’s positions, but most of them, unlike Obama, still need to face voters in the future. Of course the president matters, but I don’t know why House Republicans don’t give Senate Democrats the chore of bringing the president’s positions into line with political reality. The House could just pass its own plan and hash out its differences with the Senate in a conference committee.
A deal will be reached sooner or later. Nothing may seem to be happening on the surface, but deep beneath the still waters, things are moving right along.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book
The High Achiever’s Guide To Wealth.
Posted by Larry M. Elkin, CPA, CFP®
Beneath a stagnant-looking surface, the current of fiscal negotiation in Washington, D.C., is moving in the expected direction - and maybe more swiftly than anyone expected.
Yesterday’s unexpected retirement by Sen. Jim DeMint, a conservative firebrand from South Carolina, is the strongest signal yet that Republican hardliners know they can’t hold back the tide of higher taxes sweeping across Capitol Hill. DeMint’s departure to head the Heritage Foundation, a conservative think tank, is an acknowledgment that the tactical battle has been lost for the time being. He seems to think that, in the long run, he can accomplish more to limit the scope and cost of government, and the share of national wealth it absorbs, from outside the legislative process than from within it.
Taxes on upper-income Americans are going to go up. In fact, they have gone up already in many states over the last several years. During the presidential campaign, Mitt Romney acknowledged that federal taxes would follow suit. House Speaker John Boehner put $800 billion in “revenue enhancements” on the table as part of the Republicans’ initial offer to President Obama in the current negotiations.
The question of whether taxes on the wealthy go up via higher tax rates, as Obama insists, or via new limits on deductions, as Republicans prefer, is not trivial - but it isn’t earthshakingly important, either, as Republicans are beginning to realize. Limiting deductions would do less damage to the economy because, all else being equal, higher rates create greater distortions - such as an incentive to give more money to charity rather than pay higher taxes to the government. This is why charities are already lobbying behind the scenes to prevent limits on the tax benefits on which their fundraising feeds.
But charitable contributions are voluntary, unlike taxes. Regardless of the mechanics of any tax increase, if the government takes more of your income and you want to spend the same amount on yourself, you can still cut back your philanthropy to make your personal ledger balance. Or you can cut back the amount you invest in expanding your business with new equipment or employees. In the short term, you maintain your personal resources, although it comes at a long-term cost to your own finances as well as to the nation’s.
I have argued for several years that when taxes go up for high earners, they ought to go up for the middle class as well - to underline the point that federal spending isn’t free, and to prevent today’s voters from dumping their costs on tomorrow’s taxpayers. Neither party, however, wants to see taxes rise on the 98 percent of households for whom Obama wants to maintain current rates. Those taxes would rise if current law is allowed to expire at the end of this year, but since neither party wants to see that happen, it won’t happen. Even if politicians miss the year-end deadline, they will make a continuation of lower rates retroactive to the beginning of 2013.
The real federal fiscal problem is one of spending, not taxes, and this is where the real conflict between the parties lies. Republicans want to spend less than Democrats do. They want to make more changes in entitlement programs than Democrats want. Again, the differences are not trivial, but in the scheme of things, they are not massive. Republicans mostly want to maintain a federal government that spends an enormous amount of money on defense, health care, Social Security and many other things. Democrats unanimously want a government that spends even more on those same things, except that some Democrats would spend less on defense.
Politicians know how to bridge those differences, and when the politicians engage fully, they will do exactly that.
One obstacle is that Obama has never been much of a politician. If you like him, you may see him as a leader, a visionary or a transcendent figure, a sort of Gandhi who can nail a jump shot. If you don’t like him, you may see a bully, a narcissist or the worst sort of lawyer, one who is fully prepared to trample the law (recall his recess appointments when the Senate was not in recess, or his treatment of Chrysler debt holders) for his own purposes. Either way, he is not someone with a history of forging legislative compromise.
He has less reason than ever to compromise now that he no longer needs to run for re-election. This explains why the president’s own initial offer calls tax increases twice as large as Republicans are proposing, as well as for $50 billion in new so-called “stimulus” spending (you scarcely heard him utter the word “stimulus” during the recent campaign, given the dismal results of his first-term spending binge), and why he has made no serious move on entitlement reform. It is also why he demands a unilateral congressional disarmament on the federal debt limit, which is where Republicans have their greatest remaining leverage. Rather than require approval of ever-higher federal borrowing, Obama would treat every dollar borrowed as pre-authorized unless Congress mustered a supermajority to stop it. The result, like it or not, would be Obama unlimited.
There was a time when Obama himself didn’t like it. As a senator in 2006, he voted against a debt ceiling increase, but that vote came when Republican George W. Bush was in the White House.
It might make more sense for House Republicans to refrain from negotiating with the White House at all. After all, any legislation that reaches Obama’s desk has to clear the Senate as well as the House. Senate Democrats generally agree with the president’s positions, but most of them, unlike Obama, still need to face voters in the future. Of course the president matters, but I don’t know why House Republicans don’t give Senate Democrats the chore of bringing the president’s positions into line with political reality. The House could just pass its own plan and hash out its differences with the Senate in a conference committee.
A deal will be reached sooner or later. Nothing may seem to be happening on the surface, but deep beneath the still waters, things are moving right along.
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