The Bush-era income tax rates will expire at the end of the year. That is only one of a number of financially significant–some say cataclysmic–deadlines that occur around year end: the payroll tax holiday ends, the alternative minimum tax patch will expire, $36 billion in Obamacare taxes will take effect, tax extenders will expire, the (minimal) 2009 “stimulus” tax cuts will run out, the inheritance tax will increase, and 100% expensing for business investment will expire.
At the same time, $109 billion in sequestration begins, affecting both non-defense and, disproportionately, defense spending. But other spending reductions will go into effect as well: extended unemployment insurance benefits will expire, and, unless action is taken, Medicare reimbursement rates for physicians will decline.
And on top of all of that, the U.S. will hit its debt ceiling of $16.4 trillion in the coming weeks.
All of the above issues, and more, will be in play in negotiations between the Obama administration and Congressional Republicans over the so-called “fiscal cliff.” Because Republicans control the House and have an effective veto in the Senate, they should be able to bargain on equal terms with the administration. There is, however, a serious problem: Republicans do not speak with a single voice. There are differences between the House and the Senate, and various groups of Republicans have differing priorities. As for President Obama, he has laid down a single marker: taxes on upper-income Americans must increase. That is, in his eyes, the one absolute.
So I think the Republicans should call Obama’s bluff, and accept his offer by agreeing to let all of the Bush-era tax rates expire. Taxes on the “rich” will go back to what they were during the Clinton administration. But so, under this proposal, will taxes on everyone else. What would this mean? The 35% bracket would go to 39.6%; the 33 percent bracket would go to 36 percent; the 28 percent bracket would increase to 31%; the 25% bracket would go up to 28 percent; and the 10% bracket would be eliminated, with 15% being the lowest rate.
But wait! you say. Obama doesn’t want everyone’s taxes to go up, only rich people’s. But really, how vigorously can the Democrats object? For a decade they have been telling voters that the Bush tax cuts only benefited the wealthy–”tax cuts for the rich!”–and that Republicans don’t want to rescind the Bush tax cuts because they are holding out for billionaires. Fine; if the Bush tax cuts only benefited the wealthy, then Democrats can have no objection to doing away with all of them, and returning marginal income tax rates to what they were during the administration of the most revered Democrat of them all, Bill Clinton. It is a little late in the day for Democrats to admit that the large majority of the Bush tax cuts went to people who are not, by any definition, wealthy.