The Next Political Battles are Not Far Off

By permitting passage of a “fiscal cliff” compromise that most of them detested, House Republicans took the only sensible path available last night. It was an unfamiliar route.

Less than two weeks ago, those same Republicans rejected House Speaker John Boehner’s “Plan B,” which would have allowed tax rates to rise for taxpayers earning more than $1 million a year. Passing Boehner’s bill, which had no Democratic support, would have placed the onus on the Democrat-controlled Senate to act in time to prevent the broad and substantial tax increases and spending cuts that technically took effect yesterday, before last night’s legislation canceled them.

Passing Boehner’s plan also would have kept House Republicans, who wield their party’s only legislative instrument of power in Washington, at the negotiating table in the critical final days as details of the inevitable compromise were worked out. Instead, the Republicans marginalized their leader and, as a result, themselves. The House GOP could only watch as Senate Republican Leader Mitch McConnell, whose party has just 47 of the Senate’s 100 seats (a number that will drop to 45 when the next Congress is sworn in tomorrow) hammered out terms first with his Democratic counterpart, Harry Reid, and later with Vice President Joe Biden.

Those terms included an explicit rise in tax rates for individuals earning more than $400,000 and couples earning more than $450,000. They also included a phaseout of personal exemptions and itemized deductions beginning at $250,000 for single filers and $300,000 for married couples, which effectively raises taxes, by a smaller amount, at those income levels too. The gift and estate tax rate rises from 35 percent to 40 percent on transfers above a lifetime exemption of $5.1 million, an amount that is indexed to inflation.

From the Republican standpoint, the results could have been worse. The estimated $600 billion in increased taxes over the coming decade is much less than the $1.6 trillion that President Obama originally demanded, and is even less than the $800 billion that Boehner originally offered in his aborted negotiations with the president. (Boehner, however, proposed to raise the revenue by restricting deductions and credits, rather than by raising rates.) Democrats did not love the deal that McConnell struck with Reid and Biden.

But the tilt toward the Democrats’ priorities was evident in last night’s House vote. Democrats supported the compromise 172-16, while Republicans opposed it, with 85 GOP members voting in favor and 151 against. This was in sharp contrast to the bipartisan 89-8 majority with which the compromise passed the Senate in yesterday’s predawn hours. Unlike their House counterparts, Senate Republicans saw little point in asking their leader to negotiate for them and then rejecting what he got.

The final outcome was not clear until just a couple of hours before the vote. For much of the day, the question was whether House Republicans would allow the Senate compromise to reach the floor. They could have amended the Senate bill to reflect their own tax preferences – in all likelihood, reverting to Boehner’s Plan B or something close to it. Or they could have accepted the Senate’s tax terms but added spending cuts. Many Republicans complained throughout the day that rather than closing the national spending spigot, the compromise actually increased spending, via such Democratic priorities as a one-year extension of “emergency” unemployment benefits that are now four years old. The $30 billion cost of that extension will, by itself, absorb half the revenue from income tax increases in the coming year.

But amending the Senate compromise would have put the legislation on ice for days or weeks, if not longer. In that time, nearly every American household would have faced a major tax increase that both parties wanted to avoid, but for which House Republicans would have taken the sole blame. It is the sort of thing that might cost the GOP its House majority in the 2014 elections – an outcome that President Obama, for one, would welcome.

At the last minute, House Republicans recognized that by rejecting the Senate compromise, they would have simply played into the president’s hands.

Sometimes, in a long war, you have to concede that certain battles are not winnable. Leaders who fail to recognize this find themselves participating only in short wars. We are in the midst of a long political war over the scope and role of government in American life.

Republicans want, or at least they say they want, a smaller, less costly, less indebted government. Democrats want to maintain and expand social spending in spite of, and in fact largely because of, an aging population whose projected costs for pensions and health care have no visible means of support. Obama and congressional Democrats have made clear that they will tax and borrow as much as they can to sustain those commitments as long as possible. Obama himself, in a premature victory rally on Monday, promised to fight future cuts in such spending, at least until he can extract still more tax increases to mitigate them.

The next battles are not far off. The Senate compromise merely postponed the deep and ill-devised federal spending cuts of the fiscal cliff for two months, and the Treasury reached its $16.4 trillion debt ceiling on Monday. Treasury officials can juggle the books for, perhaps, the same two months, while Congress and the president continue to arm-wrestle over spending.

With the threat of unwanted broad-based tax increases behind them, Republicans are in a much better position to take a hard line on spending, using the debt ceiling as leverage. The administration will raise the specter of “default,” which technically would be the failure to pay interest or principal on the federal debt, as an unthinkable but unavoidable consequence of failing to raise the debt ceiling. But default would come only if the government chooses it; if the administration correctly places honoring our financial commitments first in line, it will be other bills that that don’t get paid. Failing to raise the debt ceiling is a back-door way to accomplish something many Republicans say they want: requiring Uncle Sam to balance spending with revenue.

The president sees the battle coming and is already trying to fortify his position. He warned Republicans last night not to use the debt ceiling as a negotiating tool. “I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed,” the president said after the House voted on the tax compromise.

The president will have that debate, however, whether he wants it or not. He cannot avoid it. Americans like their government benefits, and they like the idea of having other people pay for them, but the periodic review of the debt ceiling is a valuable reality check. Without it, we could go on pretending that we are not relying on other people – private citizens, foreigners and, most of all, future generations – to pay for the stuff we demand today but fail to finance ourselves.

The debt ceiling forces Democrats to reconcile their spending with its ultimate cost. It forces Republicans to reconcile their commitment to low taxes with the real-world bills our government incurs. It forces the very debate that the president does not want to have.

The only way we can sustainably get lower taxes and less debt is through less spending. The debt ceiling discussion favors the Republican side of this argument. By not crippling themselves on the tax vote, Republicans gave themselves a better chance to win the more significant battle, the one over how much the government spends, on another day.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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