Obama approaches ‘fiscal cliff’ days after victory

President Barack Obama called for an immediate tax-cut extension for people earning less than $250,000 and insisted top earners must pay more, claiming a mandate from voters as he invited congressional leaders to a White House meeting on averting the so-called fiscal cliff.

Obama and House Speaker John Boehner, in separate remarks today, left open the possibility of agreement on preserving current tax rates while limiting tax breaks for top earners to raise revenue. Such an approach, which neither has explicitly proposed, would let Obama claim the higher tax payments he seeks from the wealthy and let Boehner avoid the higher rates he calls unacceptable.

“The American people voted for action,” Obama said at the White House, giving his first public remarks on the budget and deficit since winning re-election Nov. 6. He said any solution must include spending cuts and raising revenue, including more taxes from the wealthiest.

If Congress doesn’t act by the end of the year, $607 billion in automatic spending cuts and tax increases are scheduled to take effect starting in January. That was part of deal last year to raise the federal debt ceiling.

Obama repeated the outline he laid out during his re- election campaign for a “balanced” approach to cutting the deficit.

The election showed “a majority of Americans agree with my approach,” Obama said. He called for immediate action by lawmakers to prevent rates from rising for middle-income taxpayers. “We shouldn’t need long negotiations or drama.”

Congress Leaders

Obama extended the invitation for negotiations next week to Boehner, Senate Majority Leader Harry Reid, Senate Republican leader Mitch McConnell and House Democratic leader Nancy Pelosi.

At a news conference earlier today, Boehner called for a “simpler, cleaner, fairer tax code,” staking out the Republican position before Obama spoke.

Boehner outlined the Republican approach to the so-called fiscal cliff: avoid tax rate increases and spending cuts while beginning a process to overhaul entitlement spending and the tax code.

“This is an opportunity for the president to lead,” Boehner, an Ohio Republican, said.

The president wants to let George W. Bush-era tax cuts lapse on income of individuals above $200,000 and of married couples above $250,000. That would push the top tax rate to 39.6 percent from 35 percent.

Tax Overhaul

In recent days, Boehner has emphasized opposition to higher tax rates, rather than talking about higher taxes or higher revenues. He has endorsed the idea of increasing government revenue through an overhaul of the tax code without saying explicitly whether he would support a tax increase or the elimination of tax breaks without a corresponding rate cut.

Republican congressional aides told Bloomberg News Oct. 19 that they were designing options for trading rate preservation for tax break limits if the politics allow.

The idea has promise if Republicans are willing to consider new revenue that doesn’t come from economic growth, said Michael Linden, director of tax and budget policy at the Center for American Progress, a Washington group aligned with Democrats.

“They’re going to be able to start with some of those things that raise money without raising rates, and that only gets them so far,” Linden said.

‘Glittering Generalities’

Some Democrats may insist on higher tax rates. In an interview yesterday, Representative Sander Levin, the top Democrat on the House Ways and Means Committee, said talk of limits on tax breaks was little more than “glittering generalities” that doesn’t reflect that the biggest breaks, including the mortgage interest deduction, are explicit tax policies and not loopholes.

“The top rate needs to go up and then you sit down and talk about how we reform the tax code,” said Levin, of Michigan.

Pressed by reporters today, Boehner reiterated his previous statements and said he wanted to preserve flexibility for negotiations with Obama on a deal to avert the fiscal cliff and reduce the federal budget deficit.

“I don’t want to limit the options that would be available to me or limit the options that would be available to the White House,” he said. “There are a lot of ways to get there.”

Global Recovery

Concern that the global recovery will be slowed by a political deadlock in the U.S. over the fiscal cliff and about Greece’s ability to meet debt payments has contributed to declines in stocks over the past two days. U.S. stocks rose today as better-than-forecast data on consumer sentiment overshadowed concern about the fiscal cliff.

The Standard & Poor’s 500 Index advanced 0.3 percent to 1,382.21 as of 1:58 p.m. in New York. The 10-year yield was little changed at 1.62 percent at 1:49 p.m. in New York, according to Bloomberg Bond Trader prices.

The blueprint for a deal to avoid a fiscal nightmare early next year may be found in the failed debt negotiations between Obama and Boehner in mid-2011.

The contours of that agreement included revenue increases, spending cuts and changes to lower the long-term costs of entitlement programs. Before the talks collapsed, Boehner was willing to accept $800 billion in revenue increases and Obama was ready to settle for $1.2 trillion.

$4 Trillion

Part of their negotiations on a $4 trillion deficit-cutting plan included a gradual increase in the Medicare eligibility age to 67 and an alternative yardstick for calculating inflation that would reduce annual Social Security cost-of-living adjustments.

The White House and congressional Democratic leaders view the president’s re-election and Democrats’ expanded majority in the Senate as a mandate for generating new revenue by allowing the Bush-era tax rates for higher earners to expire as scheduled Dec. 31. They want to pressure Republicans to give up their opposition to raising income taxes on couples making more than $250,000.

Exit polls conducted during the Nov. 6 balloting found that 47 percent of voters said they favored letting taxes rise for couples with incomes of $250,000 annually or more, and 13 percent said they should go up for everyone.

President’s View

In a conference call with reporters yesterday, David Plouffe, Obama’s senior political adviser, said the election results show the public “clearly chose the president’s view of making sure that the wealthiest Americans are asked to do a little bit more” to reduce the U.S. budget deficit.

In his remarks today, Boehner cited a study by Ernst & Young LLP that said higher tax rates would cost the economy 700,000 jobs.

“Raising tax rates will slow down our ability to create the jobs that everyone says they want,” he said.

The study was sponsored by business groups opposed to tax increases, including the U.S. Chamber of Commerce. The 700,000 is a long-run figure, and the study assumed that Obama’s proposed tax increases would pay for higher spending, not deficit reduction as the president says.

In a study released yesterday, the Congressional Budget Office said that extending all of the tax cuts to expire would preserve 1.8 million jobs, with 200,000 of that stemming from the changes to the top rates.