Tax rates and the fiscal cliff

Negotiations to avoid the fiscal cliff got off to a rocky start this week, with congressional staffers and White House negotiators expressing pessimism that they could agree on a deal before the end of the year. Despite conciliatory rhetoric last week both from congressional Republicans and from President Obama, the two sides remain far apart on how to avoid the large tax increases and across-the-board spending cuts set to begin Jan. 1.

House Speaker John Boehner said Republicans remained opposed to raising tax rates on wealthy Americans, but would be open to raising additional revenue through closing loopholes. Obama continued to press for a higher tax rate on top earners, a measure he said would generate $1.6 trillion more revenue over the next 10 years and help close the deficit. Federal Reserve Chairman Ben Bernanke urged the two sides to strike a deal to protect the fragile economy. “The stakes are high,” he said.

The president still has the upper hand, said David Frum in TheDailyBeast.com, and he figures he can use it to pressure Republicans into yielding on their no-tax pledge. But Republicans should “play for time.” Obama “will never again be stronger than he is this month.” He doesn’t want to risk the economy relapsing into recession, so the longer the GOP stalls, “the better deal” it will get.

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Obama is right in saying that “the math doesn’t add up” on the GOP’s proposal, said Ezra Klein in WashingtonPost.com. Capping tax deductions at, say, $17,000 per family might raise $1 trillion. But not only would that kill philanthropy and hobble the housing sector—it’s just not enough. “Raising the top tax rate is the only realistic way to get the revenue.”

Republicans will concede on taxes only if they get major entitlement reforms, said Ramesh Ponnuru in Bloomberg.com. They have real leverage in arguing that we can only reduce the deficit by slowing the growth of Social Security and Medicare spending. Alas, Democrats will never let Obama agree to such a deal. Gridlock is on the way, “followed by competitive finger-pointing.”