In case you've forgotten: A previous budget agreement will force $1.2 trillion in both federal tax hikes and government budget cuts, starting next week, which economists say is likely to start a new recession -- a shock that Federal Reserve boss Ben Bernanke calls "the Fiscal Ciff" -- unless Congress and the President agree to a long-term plan that would ease the impact while still trimming the deficit.
They say they're trying -- Senate leaders seem willing to deal -- but conservative House Republicans still want more cuts, less taxes -- and President Obama, post-reelection, isn't feeling much pressure to cut more than he already has.
Writes veteran market-watcher James M. Meyer, of $1 billion-asset Tower Bridge Advisors, in a report for clients of Conshohocken-based Boenning & Scattergood:
Taxes and other revenue enhancements need to total about the same amount. The Republicans are near the $1 trillion range and the President is asking for about $1.4 trillion... A final agreement might look like the following:
1. Maintaining the Bush tax cuts for those making less than $500,000.
2. For those making more than $500,000, the top tax rate would be up to but no greater than 39.6%.
3. Capital gains and dividends would be taxed at 20% plus the ObamaCare surcharge.
4. Estates would be taxed at 2009 levels. [up from 2010 ‘estate tax holiday’, down from 2009 and previous higher level]
5. There would be an AMT [alternative-minimum tax] fix retroactive to 1/1/12.
6. Either the sequestration will remain in place or it will be replaced by a package of spending cuts totaling about $1.2 trillion. At least half would come from entitlements [Medicare, Medicaid, Social Security] in some specified manner.
7. There will be a pledge to engage in further spending cuts and further tax reform later in 2013, a pledge that probably won’t be fulfilled.
8. There will be an agreement to raise the debt ceiling.
If the above package is wrong, I doubt it is off by a lot. Whether it gets done in December, January or February, I don’t know. However, I don’t believe this package can be broken up.
WHY DEMOCRATS DON'T WANT TO CAVE MORE: A partial agreement just to deal with the middle class tax cuts will take a lot of leverage away from the Democrats. They don’t want to be held hostage to the debt ceiling issues as noted above. But to get there, they clearly have to move on spending.
WHY OBAMA THINKS HE DOESN'T HAVE TO CAVE MORE: The President thinks he earned a mandate in the election to do things his way. For that reason, he isn’t even back to where he was in July 2011 in terms of spending cuts. Theoretically he may be right but that won’t matter if Republicans hold firm on spending. Neither party has the strength to get a one-sided agreement...
INVESTORS ARE ACTING AS IF: Markets still expect a compromise within days or weeks...