Expect a compromise on fiscal cliff, but the hard work will be tax reform

By Saba Long

The last line of the great Herman Miller’s poem — “The Martyr”— sums up how the American public should treat the political theatrics regarding the fiscal cliff being acted out by our Democratic and Republican leaders in Washington. “Beware the People weeping when they bare the iron hand.”

U.S. Treasury Secretary Tim Geithner, U.S. House Speaker John Boehner and other partisan actors performed their one-act plays on the various Sunday political talk shows, declaring the opposite side as unwilling to compromise. Boehner called the Democrats plan to avoid the fiscal cliff as “unserious.”

In a phone interview, Mel Schwarz, director of tax legislative affairs for Grant Thornton, shed some light on the negotiations and what could lie ahead.

“Personally, I believe there is a stronger drive to find a solution than in the 2010 discussions,” Schwarz said. “Don’t pay much attention what either side is saying right now. The heavy lifting has yet to take place but we’ll see some form of compromise by Dec. 31.”

Schwarz likened the economic fallout of not reaching a compromise to “jumping the curb” rather than a “fiscal cliff”.

According to the nonpartisan Congressional Budget Office (CBO), under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending — a development that some observers have referred to as a “fiscal cliff.”

The CBO projects a .5 percent decrease in gross domestic product and increase in the unemployment rate up to 9.1 percent by the fourth quarter of 2013.

Essentially, the combination of abrupt tax increases and spending cuts, also known as sequestration, will hurt the economy for a full year with economic growth picking up in year two, allowing for a projected unemployment rate of 5.5 percent by 2018 — a number we have not seen since 2005.

The CBO notes the federal debt is more than 70 percent of Gross Domestic Product. A preventive austerity measure to begin Jan. 1, 2013 is to maintain current tax revenues but make substantial cuts to programs or to maintain the large benefit programs (i.e. Medicare, Medicaid, Social Security) but significantly increases taxes.

On Meet the Press on Sunday, Grover Norquist of Americans for Tax Reform, called on Republicans who may be considering raising taxes and who have signed his “no new taxes” pledge to go back to the drawing board. To be willing to raise taxes is to think ‘impure thoughts,” said Norquist, as if he likens their allegiance to his cause as to marital vows.

The U.S. Chamber of Commerce has asked Congress to extend the Bush tax cuts, extend vital expired tax provisions, provide relief — capital gains and the home mortgage interest deduction fall under this umbrella — and find spending cuts to replace those mandated under sequestration.

Opportunities for revenue increases include eliminating the Bush tax cuts which calls for a raise on all income tax rates, as well as the alternative minimum tax (AMT), capital gains and the home mortgage interest deduction.

The Social Security payroll tax cut will increase 2 percent, the Research and Experiment tax credit will be eliminated and taxes related to the Affordable Care Act will be enacted.

Spending cuts under consideration include $109 billion in budget cuts under the sequestration line items, unemployment benefits and the Medicare “Doc Fix” — roughly 30 percent decrease in pay to physicians.

Regardless of what happens before on Dec. 31, these discussions are merely the aperitif for the larger item Congress must tackle — reforming business and income tax codes. Don’t the let the antics of either party fool you; there is more going on than meets the eye.

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