Late last week, President Barack Obama unveiled his proposal to avert the looming fiscal cliff at the end of the year, which was immediately rejected by House Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.). Consistent with the provisions in the fiscal 2013 budget package, the proposal called for a net $1.6 trillion in new tax revenue over ten years plus $400 billion in cuts to federal spending.
On the tax side, the White House proposal would increase the top marginal income tax rates and investment tax rates for upper-income individuals, extend the lower Bush-era rates for low- and middle-income taxpayers, reduce the value of certain tax preferences for upper-income taxpayers, and return the estate tax to its 2009 levels (a top rate of 45 percent with a $3.5 million exemption).
Additionally, the proposal calls for patching the individual alternative minimum tax, renewing various expired and expiring business tax extenders provisions, and extending bonus depreciation as well as the temporary two percent payroll tax holiday. For the longer term, the White House proposed reforming the tax code in a manner that would retain the levels of progressivity achieved through the proposed adjustments to the income tax rates.
For spending reform, the plan calls for a one-year delay in the sequestration provisions enacted under the Budget Control Act of 2011, a multi-year stimulus package with at least $50 billion allocated for 2013, an extension of unemployment insurance benefits, and additional unspecified savings from non-entitlement mandatory programs, all to take effect next year. This would be followed in the long term by up to $400 billion in cuts to Medicare and other entitlement programs outlined in the president’s FY 2013 budget. The proposal also reportedly included a provision that would allow the White House to raise the federal debt ceiling by limiting Congress’s power to block future debt ceiling increases.
For his part, Speaker Boehner rejected the proposal and reiterated Republicans are willing to accept new revenue in a fiscal cliff deal if it comes from tightening or eliminating deductions and tax credits, but not by tax rate increases.
In response, on Monday, Speaker Boehner sent a letter to the President with a new counteroffer proposal inspired on testimony by Erskine Bowles, the Democratic co-chair of a presidential committee tasked with figuring out how to solve the debt problem.
The three-page letter proposes cutting $2.2 trillion that does not raise tax rates on upper income Americans but does include $800 billion in new tax revenue, $600 billion in health care cuts and $600 billion in other cuts in discretionary and mandatory spending.
The White House quickly responded, noting that Boehner’s plan doesn’t meet the “balance test.” Furthermore, the Obama Administration noted there would be no compromise on higher taxes for those earnings more than $250,000. Speaking Tuesday, the president stated that while tax rates must go up for a fiscal cliff deal, it may be possible to lower rates at the top end of the scale late next year as part of tax reforms that would close loopholes and limit deductions.