The Independent Market Observer

12/17/12 - GOP to Millionaires: Drop Dead!

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Dec 17, 2012 9:20:42 AM

and tagged Fiscal Cliff, Politics and the Economy

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That’s an unfair headline, but what the heck. The big political and economic news in the U.S. this weekend was Speaker Boehner’s offer to allow higher tax rates on those making more than $1 million per year. That at least was the headline. But buried in the proposal was something more significant—an offer to extend the debt ceiling for at least another year or so.

The GOP—at least the portion of it not in safe, gerrymandered districts—is starting to recognize that, if the country does go off the cliff, the Democrats will get a lot of what their base wants—higher taxes, especially on the “rich,” and lower military spending—and the Republicans will get blamed by the Independents. Sure the country will suffer, but from a political point of view it doesn’t get much better than that for the Democrats. Boehner, who is speaking for the wing of the GOP that will be exposed in the next election cycle, is trying to cut a deal—or at least look as if he is doing so. As predicted, this is coming at the last minute.

The White House has made positive comments about the Boehner proposal but faces multiple problems in actually accepting it. The first is that it was made with conditions on spending cuts and entitlement reform, which will be difficult to enact. The second is that it remains uncertain whether Boehner can actually deliver on his deal, as memories of the failed negotiations from the 2011 debt ceiling talks remind us. Finally, it is not certain whether the Democrats could deliver on their side of the deal on spending cuts, even if Obama were to agree.

Still, there is no denying that this represents a potential breakthrough in negotiations and an apparent recognition by at least some Republicans that they are going to take quite a bit of the blame if everything falls apart. Another problem, though, is that with the last proposal the Republicans made a big point of having all of the House leadership sign on, including Paul Ryan. With the current proposal, that has not been included. In fact, today’s front-page Wall Street Journal article “GOP Poses Millionaire Tax-Rate Increase” specifically talks about how the proposal could face “even stiffer opposition from conservatives,” although it goes on to say that many expect the House rank and file to cut Boehner some slack.

We really are getting to the end of the game here, as the time for Congress to turn any proposal into legislation and vote on it is just about over. If a deal is not cut in this Congress, the process may well have to start over again in the next Congress, with some difference in the players and the complicating factor of an immediately pending debt ceiling expiration. If a deal is going to be cut easily, now is the time. Boehner has started the ball moving again, but it is too early to tell where it will end up.

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