Obama, Boehner close gap on fiscal cliff deal, eye trillion-dollar tax hike

Neil Munro | White House Correspondent

White House and congressional sources are reporting movement towards a jagged bundle of tax hikes and spending cuts that would avert January’s fiscal cliff.

But the deal may fall apart, partly because it calls for substantial sacrifices by each political faction.

It also may be insufficient to head off a financial crisis in the next few years, because it would still increase the federal government’s $16.3 trillion debt by up to another $7 trillion over the next 10 years.

The latest turn in the negotiations came Monday afternoon, when President Barack Obama offered House Speaker John Boehner a 10-year plan that boosts the federal government’s take of the national economy by roughly $1.3 trillion, while trimming spending by only $930 billion, according to GOP aides.

White House aides say the plan would increase taxes by $1.2 trillion, and cut spending by $1.2 trillion.

Obama’s plan calls for a two-year increase on the ‘debt limit, delaying another debt limit crisis until after the 2014 mid-term elections.

The package would supplant the legislatively scheduled fiscal cliff, which will automatically impose a package of spending cuts and tax increases in January. If not countered, those automatic changes will drain $500 billion from the economy in 2013.

GOP spokesmen did not spurn Obama’s proposal. (RELATED: Conservative group launches campaign to remove Boehner from speakership)

“Any movement away from the unrealistic offers the president has made previously is a step in the right direction, but a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced,” said a statement from Boehner’s office.

“We hope to continue discussions with the president so we can reach an agreement that is truly balanced and begins to solve our spending problem,” the statement said.

Obama’s proposed $1.3 trillion take includes a tax-rate hike on people earning more than $400,000 a year, plus a complex rejiggering of tax rules to trim many tax breaks used by wealthy Americans.

That’s a climb-down from his call for $1.6 trillion in tax increase on entrepreneurs, executives and professionals earning more than $250,000.

Some of Obama’s proposed spending cuts are clearly defined.

The Pentagon would get hit for $100 billion. $130 billion would be saved by trimming inflation adjustments to Social Security payments, and almost $400 billion could be saved because reduced federal borrowing also reduces interest payments.

But many of the possible spending curbs are vague. For example, roughly $400 billion of proposed savings are labeled health care cuts.

Those cuts could create long waiting lines or eliminate important services, and then be reversed by popular protests. GOP leaders prefer long-lasting savings that result from actual reforms, such as greater use of market incentives, or clear rollbacks of payments to wealthier retirees.

Obama’s limited spending cuts are also offset both by a plan to fund another stimulus, worth at least $50 billion, and by a proposal that would let the payroll tax climb back up to its pre-2010 level.

The payroll tax reduction has acted as a $100 billion-plus annual stimulus for the economy, but it has also ensured that the Social Security program is now paying out more from its storehouse of IOUs than it is receiving in payroll taxes.  (RELATED: More details on Obama’s counter-offer)

Together with some public-relations efforts and the 2011 cuts that would be confirmed by a deal, Obama could describe the package as slicing $4 trillion from the pending 10-year deficit of $9 trillion.

However, small-government advocates — and Wall Street analysts — could readily describe the deal as only a $2 trillion plan that would reduce the government’s planned 10-year borrowing from $9 trillion to $7 trillion.

In his first term, Obama boosted the national debt by almost $6 trillion to $16.3 trillion. If the deal sets future borrowing at $7 trillion, he would leave the Americans with a massive debt of $23 trillion in 2022, just as millions of retired boomers are set to increase retirement and medical spending.

That huge debt is risky, because lenders might decide that the country’s increasingly low-skill labor force can’t pay the annual interest-rate payments.

If the lenders worry about repayment, they’ll boost interest rates, which could shove the country back into a recession — and toward Greece-like unrest.

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