Dec. 4 (Bloomberg) -- U.S. House Speaker John Boehner proposed $2.2 trillion of spending cuts and new revenue that lack what President Barack Obama calls essential for a fiscal agreement: higher tax rates for top-earning Americans.
Boehner, an Ohio Republican, said yesterday that it was a “credible plan that deserves consideration by the White House.” The Obama administration promptly rejected the proposal, which would raise the Medicare eligibility age and slow Social Security cost-of-living increases.
The two sides remain far apart with about four weeks left before more than $600 billion in tax increases and federal spending cuts start taking effect, possibly triggering a recession. As political pressure mounts, Democrats continue to insist on higher tax rates for top earners while Republicans press for reductions in entitlement programs.
With the Republican blueprint, both parties now have their opening offers on the table. Nebraska Senator Ben Nelson, a Democrat, said the Republican plan signals “act two” in negotiations over the so-called fiscal cliff. “There will be an act three undoubtedly, and hopefully the distance between the bid and ask is closed,” he said.
Even so, the Republican offer signifies a step forward in negotiations that four days ago Boehner had pronounced at a stalemate, said Jim Manley, a former aide to Senate Majority Leader Harry Reid, a Nevada Democrat.
Republicans argued their plan is similar to one offered in 2011 by President Bill Clinton’s former chief of staff, Erskine Bowles, and it signals they are willing to consider new federal revenue from a net increase in taxes. Congressional Republican leaders said their proposal puts the onus back on the White House to make the next offer to keep negotiations on track.
Previously, Republicans had insisted on revenue achieved only through economic growth, and last week they rejected Obama’s proposal to raise $1.6 trillion in taxes, including by increasing tax rates on the top 2 percent of earners.
“This may be a hopeful first step,” Manley said. “Both sides are trying to show they’ve done their bit and it’s on the other one to act,” he said. “Nothing’s going to happen until the deadline is looking everyone in the face.”
The $2.2 trillion Republican plan is the first offer from either party that pitches major changes to U.S. entitlement programs, with $900 billion in cuts. It would collect $800 billion in new tax revenue from revisions that would eliminate unspecified deductions and credits.
The proposal follows the outlines of a $4 trillion grand bargain Obama and Boehner were negotiating last year before talks imploded. Still, it doesn’t meet the president’s demand for higher tax rates on top earners, a major plank in his re- election bid.
While the plan resembles that aborted grand bargain, Democrats say the outcome of the Nov. 6 election gave them a mandate to ask for a higher revenue number and to achieve it by ending the upper-income tax rates.
Bowles, the former co-chairman of a presidential deficit- reduction commission, said in an e-mailed statement that the Republican proposal doesn’t reflect his 2011 plan. “Circumstances have changed since then,” he said. “It is up to negotiators to figure out where the middle ground is today.”
U.S. stocks fell yesterday. The Standard & Poor’s 500 Index dropped 0.5 percent to 1,409.46 in New York. Treasury 10-year note yields traded close to a two-week low. They were little changed at 1.63 percent at 8:11 a.m. in New York, according to Bloomberg Bond Trader data. The rate fell eight basis points last week and reached 1.59 percent on Nov. 30, the lowest level since Nov. 19.
White House officials met yesterday with Wall Street executives, including Marc Lasry, managing partner and founder of Avenue Group LLC, and Gary D. Cohn, president of Goldman Sachs Group Inc., and urged them to pressure Congress for a deal, according to two people familiar with the meeting. They met with Valerie Jarrett, Obama’s senior adviser; Alan Krueger, head of the Council of Economic Advisers; and Jason Furman, deputy director of the White House National Economic Council, said the people, who requested anonymity because they weren’t authorized to discuss the meeting publicly. Obama didn’t attend the session, they said.
The Republican proposal “does not meet the test of balance,” White House Communications Director Dan Pfeiffer said in a statement yesterday. “In fact, it actually promises to lower rates for the wealthy and sticks the middle class with the bill.” He said the plan included “nothing new.”
Obama would trade $600 billion in spending cuts for $1.6 trillion in tax increases, primarily targeting families with more than $250,000 in annual income. Boehner called it a “la-la land offer.” The budget deficit has exceeded $1 trillion for each of the four years Obama has been in office.
The two sides are far apart, said Jon Traub, managing principal of tax policy at Deloitte Tax LLP in Washington. The disagreement over raising income tax rates on Americans making more than $250,000 a year is fundamental.
“Are we Chicken Little complaining about something that’s not going to happen?” Traub said. “My heart tells me we’re like Chicken Little, that we’re going to come to a compromise. My head’s beginning to wonder whether that’s possible.”
Democrats, led by Reid, have said any changes to Social Security are off the table in the fiscal-cliff talks.
Under the Republican proposal, increases in Social Security benefits would be reduced under a new method of calculating cost-of-living increases. The so-called chained consumer price index would also apply to cost-of-living adjustments for government pensions and to setting income-tax brackets.
The plan would raise the eligibility age for Medicare recipients, now 65, although it didn’t specify by how much. That would save $100 billion, according to an excerpt of congressional testimony Bowles delivered in November 2011.
“To protect millionaires, Speaker Boehner’s offer would force middle-class families to pay higher taxes,” Reid said in a statement. “Republicans have made an offer, but now it is time for them to get serious about forging a balanced approach.”
Boehner, in a letter to Obama outlining the proposal, said the additional $800 billion would come through “pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates.” He didn’t lay out specific proposals for curbing tax breaks and didn’t offer additional revenue for 2013.
In the past, many Republican calls for additional revenue through rewriting the tax code intended for the money to come from higher economic growth spurred by the overhaul. Obama and the Congressional Budget Office won’t accept so-called dynamic scoring. Republican aides said the $800 billion would come from conventional scoring, which means there would be a tax increase.
“The good news is they’ve given up on the long- discredited, so-called dynamic scoring,” said Manley, the former Democratic aide.
North Dakota Democratic Senator Kent Conrad, chairman of the Budget Committee, called it “useful” that the revenue in the plan “is not make-believe.”
In a series of network television appearances over the weekend, Treasury Secretary Timothy F. Geithner challenged Republicans to make a counteroffer to the president’s plan. He said there would be no agreement without higher income tax rates on the wealthiest Americans. Boehner said on Dec. 2 that the talks had gone “nowhere.”
Following the Republican offer, Conrad said prospects are “still reasonably” good for getting a deal before the end of the year “if everybody keeps cool and doesn’t overreact to every volley over the net.”