As the days tick down to the new year, Washington edges closer to the moment when taxes go up and spending is cut in such drastic fashion that the recovering economy could be thrown back into recession. With President Barack Obama and House Speaker John Boehner talking and trading proposals, there is renewed hope that the president and Congress can find a way to avoid the "fiscal cliff." Boehner made a notable concession Friday by telling the president he could accept higher tax rates on incomes of over $1 million, and the two talked again Monday. Both the administration and Congress should be willing to bend a little.
Up until the change, Boehner had rejected a rise in tax rates as a way to raise $1 trillion in new revenue over 10 years. Instead, he recommended eliminating tax deductions, credits and loopholes — though refused to say which ones — or capping deductions at a set maximum. Many economists say there is no way to raise that much new revenue through these steps without eliminating or reducing middle-class tax deductions such as the home mortgage interest deduction.
Obama's approach would allow the Bush-era tax cuts to expire on incomes over $250,000 — the position the president took during the campaign. He would extend the Bush-era tax cuts on the middle class but allow the top two income tax rates of 35 percent and 33 percent to rise to what they were under President Bill Clinton, 39.6 percent and 36 percent. A majority of Americans support this, and Boehner can read the polls.
For a deal to happen, Democrats will have to accept some adjustments to the cost of Medicare and Medicaid. Otherwise, if both sides dig in, an estimated $520 billion in tax increases and $130 billion in spending cuts will occur automatically, with the average American seeing his or her tax bill rise by $3,446 in 2013, according to the Tax Policy Center. The trigger was put in place by Congress in 2011 as a budget-control measure. It was hoped the untenable spending cuts and taxes would spur both Republicans and Democrats to work out an agreement. They still may.
But this lurching from one artificial partisan crisis to the next cannot be the way Washington operates. The deal made between Obama and Boehner has to include provisions to avoid other foreseeable fights. For instance, it must raise the debt ceiling — otherwise the country won't be able to pay its bills by sometime early next year. Boehner is offering a one-year reprieve. Why not make it longer? And now is not the time to let the temporary payroll tax cut of 2 percent expire or to eliminate federal emergency unemployment benefits. These measures keep money pumping into the economy and cushion the lingering effects of the recession.
Boehner's acceptance of some tax rate rise demonstrates that there is some give-and-take going on. His proposal of raising tax rates on incomes over $1 million would raise an estimated $269 billion over 10 years. That would be a start, and it is a signal to keep talking.