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Eye on the ‘Fiscal Cliff’: Is President Obama’s Proposal a Deal-Breaker?

Nov. 26, 2012 3:54pm Guest Post

[Editor’s note: The following is a cross post by Larry Kudlow that originally appeared on CNBC.com]:

CNBCs Larry Kudlow Examines the Fiscal Cliff Negotiations

(Getty Images)

Right after the election, it was all peaches and cream and conciliatory common-ground language when President Barack Obama met with congressional leaders to discuss the “fiscal cliff.”

Of course, the president campaigned on tax hikes for the rich, by which he meant raising top income-tax rates and extending the Bush tax cuts for incomes below $200,000.

And the president’s first meeting post-election was with his union and liberal-interest-group supporters, all of whom want to raise the top rates and then some. But instead, the newly re-elected president spoke about “new ideas,” as long as they provided a balance of spending cuts and tax increases on the most successful upper-end earners.

Now, however, a stalemate may be just as likely as solution. Why?

Well, it was former Bush advisor Keith Hennessey who discovered a big obstacle in all this. Team Obama wants a gargantuan $1.6 trillion tax hike over the next ten years to finance larger government. And Hennessey surmised — and I agree — that the reason the president couched his language in terms of higher tax “revenues” rather than tax “rates” is that he essentially wants both. Raise the top rates and cap or eliminate a number of tax deductions for more revenues.

This is going to be a big problem. It could well be a deal-breaker.

House Speaker John Boehner has been pressing for a quasi tax reform, which may be the best Republicans can get. Namely, leave the tax rates alone and put a Mitt Romney-like cap on so-called tax loopholes that mainly concern upper-end earners.

This Republican revenue concession would at least preserve economic-growth tax incentives. Yes, it would transfer $1.3 trillion from the private sector to government hands, a huge anti-growth transfer of resources. But at least the Boehner plan leaves tax rates unchanged.

However, raising the two top rates would only produce about $440 billion, which is way below Obama’s $1.6 trillion number. So you can almost sense that the president is going to go for higher tax rates, strict limits on itemized deductions, a phase-out of the personal exemption, and tax-rate hikes on capital gains, dividends, and estates.

On top of all that, the Financial Times reports that Team Obama wants a $150 billion business tax hike over ten years.

Sooner or later this is the Obama agenda. And it’s going to be a big stumbling block for a year-end deal that would avoid a roughly $450 billion tax hike that would sink us back into recession.

(Getty Images)

New reports suggest there’s no progress between the White House and Republican congressional leaders. No wonder. The debate looks to be about higher revenues and rates, not a true compromise, and Republicans are getting boxed in.

None of this revenue transfer to the government is remotely pro-growth. And hiking taxes on capital gains and dividends is significantly anti-growth. With Obamacare taxes, the 15 percent cap-gains tax could run up to 23.8 percent and the 15 percent dividend rate could jump to 43.4 percent. And that doesn’t even include the integrated corporate tax rate.

So here’s the economic-growth problem: The after-tax-incentive return on cap-gains would fall more than 10 percent. On dividends it would drop over 33 percent. (Interestingly, over 100 large companies have declared special dividends to beat a year-end tax hike.) This raises the cost of capital and lowers the return on investment for the entire economy.

By making capital less valuable and more expensive, you get less of it. And you can’t have entrepreneurial capitalism without capital. Higher capital costs block business formation, productivity, jobs, and incomes.

Frankly, in terms of long-run economic growth, taxes on capital investment are more important than income taxes. On top of that, every time the capital-gains tax rate is raised, it generates lower long-run revenues. But if you cut the rate, revenues soar. Just ask Bill Clinton, whose second-term capital-gains tax cut led to a budget surplus.

(Getty Images)

And nobody is even talking about spending. The original across-the-board sequester, which was supposed to slash $1.2 trillion from the budget, is off the table. Apparently, $50 billion is the new number. So let me get this right: A $500 billion tax hike, and a $50 billion spending cut. That’s revenues-over-spending by ten-to-one. Wasn’t Simpson-Bowles looking for $3 or $4 in spending cuts for every $1 of new revenues?

So, it looks like way too many tax hikes, way too few spending cuts, and a big anti-growth fiscal package that is more like European-style austerity than American-style, free-enterprise recovery. This is why the stock markets are so nervous. They don’t know what they’re gonna’ get.

Right now, stalemate is just as likely as solution.

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Comments (65)

G-WHIZ
Posted on November 27, 2012 at 10:21am
King-O’ has nuttinta worry about since BONEHEADBONHER WILL INSTANTLY CAVEIN AT LAST SECCOND AS USUAL!!

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universalphilos
Posted on November 27, 2012 at 12:26am
Perhaps this spiritual guidance, May 25, 1973, will be helpful today?
“We have told you of the famine to come. Do not run around as hysterical children. Do not destroy those things that you have built. We shall guide you. Take each step in a sensible manner. But remember also the feeding of your families, the seeing to their needs, is just as important as the preparation for that time, and it is in part of itself….” http://www.angelfire.com/in4/aup_messiah/1973May25.audio.html

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xendude
Posted on November 26, 2012 at 9:36pm
Implementation of the sequester was always the plan. Before socialism can be fully implemented the middle class must be wiped out.

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FANGS
Posted on November 26, 2012 at 8:51pm
Note to all Navy Seals, Obama let your two guys fight alone for 7 hrs. and Die in bengazi. Please be a Hero for Your Country. You’re trained, we aren’t. The rest of us taxpayers will take care of the streets. And America will reset and everyone will Prosper and be free.

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FANGS
Posted on November 26, 2012 at 8:43pm
I didn’t read about any cuts in this article. NO MORE MONEY. Get it! This Govt is on the verge of causing a genocide. Americans are beyond pizzed.

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- Ghandi was a Republican
  Posted on November 26, 2012 at 8:59pm
  We can save everything obama claims to be looking for by repealing obamacare. 230 Districts elected representatives based on exactly this. Obama may be able to point to 3 who actually elected someone on a STATED position of keeping it. If obama wants to talk mandates- This one is clear.
  Obamacare should immediately be put on the table, right up front.
  OBAMACARE ALONE IS RESPONSIBLE FOR THE FISCAL CLIFF.
  America rejected it loud and clear twice now. 2010-2012
  
  Report this comment
deacs
Posted on November 26, 2012 at 6:53pm
In 2000 when the budget was about as close to being balanced as one could hope for, the gov’t spent right at 1.8 trillion dollars. Here we are just over a decade later and spending over twice that amount of money, the whole time inflation running below 3%, yet now these clowns can’t find a dime to cut? I’ll say it again an additional 1.7 trillion dollars to spending and they can’t find a dime to cut?!!!

You want to balance the budget in 1 year? Go back to 2004 spending. It’s that simple and the median income in this country is the same as it was then. Why should the gov’t need more, especially now that the wars are over? This might be funny if it wasn’t so sad.

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- db321
  Posted on November 26, 2012 at 7:52pm
  The Dems and Obama will block everything and anything presented by Congress. Taxes will go up on everyone. Obama blames Republicans and the crazy system we have under the Constitution. Then Obama lowers taxes on Middle class and below. Blames Republicans and throws the Constitution out.
  
  End of America. Game Over! And all the idiots say, Hail Obama!
  
  Report this comment
noslave
Posted on November 26, 2012 at 6:22pm
like they did to bush sr “pass our taxes we’ll give you spending cuts down the road?? like lucy and the football they screwed him,gave nothing in return,obama ,reid,pelosi are much more sleazyier and sneakerier,you gotta count your fingers,if they shook your hands,that kind of sneaky??make them lay out what they will cut in spending 1st before giveing them anything,be loud,stand your ground,whine if you have to like they do??gotta let the people know that if we fall apart its because of dems blocking spending cuts,F being mr nice guy it got you nowhere,call them out when they play games.

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Red Bubba
Posted on November 26, 2012 at 5:41pm
This is political performance art.
The vast majority of Americans are ignorant of basic economics and liberty. Our taxes will be raised and our “leaders” will be praised for saving us from going over the cliff, and the country will still be bankrupt.

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My Two Cents
Posted on November 26, 2012 at 5:40pm
I pay more than my fair share of taxes and any tax hike will be a boon for my business.

Having said that, I have reached a point where I would take pleasure in seeing the middle-class taxpayers who supported Obama incur a major tax increase. Taking another 5k out of their wallets every year might be the only thing that will wake them up.

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moreteaplease
Posted on November 26, 2012 at 5:14pm
ArmedAndReallyPissed
Posted on November 26, 2012 at 4:25pm

But they do have an Obozo Phone and by God, they do own that !!!!!!
——————————————————–
And that’s all they need to make everything right in their little world. They have no clue what they have done to themselves yet but they will. It’s going to come back and bite them…it always does.

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MrKnowItAll
Posted on November 26, 2012 at 5:01pm
First Stimulus Money would have given ever American in the United States $447,000 EACH. This is what should have been done. Whoever BLEW there Money, never should have been allowed to get another Dime from the Taxpayers in their Lifetime.

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- Chet Hempstead
  Posted on November 26, 2012 at 8:33pm
  This is obviously not true. $447,000 for every person in America would be over 135 quadrillion dollars. When you make up numbers out of nowhere, try to remember that everyone who reads your nonsense will be doing so with the use of a computer, a device originally named for its ability to do mathematical computations, so they can check your numbers and see whether they make any sense or not.
  
  Report this comment
- Chet Hempstead
  Posted on November 27, 2012 at 1:50am
  I’m sorry, did I say quadrillion? It would only be 139 TRILLION. That’s still impossible.
  
  Report this comment
drenfroe
Posted on November 26, 2012 at 4:54pm
We are Americans we can get through anything.

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- Snowleopard {gallery of cat folks}
  Posted on November 26, 2012 at 5:18pm
  We can overcome anything, this challenge will be harder than any others before in our nations history save for the original Revolution and the forging of a Constitution.
  
  Report this comment
JUSTANOTHEROPINION
Posted on November 26, 2012 at 4:37pm
The only people who are surprised are the idiots that supported Obama and his re-election.

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- The_Jerk
  Posted on November 26, 2012 at 4:43pm
  The economy needs to fail. Then we can use lead as currency.
  
  Report this comment
- doomytram
  Posted on November 26, 2012 at 4:57pm
  The Soros controlled media is creating a political theater with Jamie Foxx playing Obozo and Clay Aiken plays Rahm and Carney both.
  
  Report this comment
- cessna152
  Posted on November 26, 2012 at 5:02pm
  Then I can hand them my currency really, really fast and one at a time…..
  
  Report this comment
- rickc34
  Posted on November 26, 2012 at 5:18pm
  The cliff is for the many the goverment will make out like bandits on the increase tax revenue so Obama wants the talks to fail. More money in his pocket.
  
  Report this comment
no1hd
Posted on November 26, 2012 at 4:32pm
From what I hear on the news – corker is not going to run next year..He will not have a believable platform considering the first he ran on said he would not vote to raise taxes..

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FANGS
Posted on November 26, 2012 at 4:32pm
Lets just start a war and get it over with. Democrats must be destroyed.

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- BODYBAG
  Posted on November 26, 2012 at 4:43pm
  Outstanding idea. Lets refer to it as “societal cleansing”.
  Elimination of communist elements on US soil.
  Someone give the signal.
  
  Report this comment
- mercenary4freedom
  Posted on November 26, 2012 at 5:24pm
  100% agree FANGS, time to get this mess straightened out
  
  Report this comment
no1hd
Posted on November 26, 2012 at 4:29pm
Listen to all he says, when class is dismissed – leave smiling and happy to see the downfall of a commie prez..

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seeker9
Posted on November 26, 2012 at 4:28pm
Fact of the matter is, the actual greed in this country is in the government and all the Dems. They just can’t steal enough money to whet their appetite. Then they claim, like always, it is some one else is the problem.

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ArmedAndReallyPissed
Posted on November 26, 2012 at 4:22pm
Give this Communist nothing but the middle Finger.

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- BODYBAG
  Posted on November 26, 2012 at 4:44pm
  That’ll work for now.
  
  Report this comment
- Rothbardian_in_the_Cleve
  Posted on November 26, 2012 at 5:27pm
  Don’t worry. John Boehner will stick to his guns. Hahahahahahahah!!!!!
  
  Report this comment
- progressiveslayer
  Posted on November 26, 2012 at 6:19pm
  Ask and ye shall receive! http://www.youtube.com/watch?v=EW-i1LTDxR0
  
  Report this comment
Chromo200
Posted on November 26, 2012 at 4:11pm
This may be simplistic approach,but if the Republicans in congress state their opinions, and vote present, let the Dem, and Obama take the hit, because Obama’s agenda is going to happen and the republican will loose more of it’s membership when they compromise. Republicans must find a away specially in the house to make it look like the Senate and Obama are being obstructionist. This will never happen because the republican leadership is week knee’d and they will cave in because they want the free stuff that comes with being a congressman and Obama knows it.

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- girlnurse
  Posted on November 26, 2012 at 4:23pm
  At this point it is ALL a show and you have got to be a complete fool not to see it!
  The R’s and D’s are ONE party….the party of:
  “I love my government job and will do anything to keep it”
  “We are the elite and WE will tell the peons what to do”
  
  Report this comment
- The_Jerk
  Posted on November 26, 2012 at 4:26pm
  If Republicans compromise again, it will be the end of the Republican party.
  
  Report this comment
- Cavallo
  Posted on November 26, 2012 at 4:51pm
  @The_Jerk, the republicans should give the Dems everything they want. Hook line and sinker. Maybe even give them 20% more than they are asking. Give the American people exactly what they wanted in Obama. Make it a challenge to see how far down the Economic Freedom List we can drive the United Soviet States of America.
  
  Report this comment
- jhrusky
  Posted on November 26, 2012 at 5:25pm
  @ girlnurse
  
  You are so correct. Unfortunately so many here cannot see that that is the entire problem and continue to play party politics.
  
  Report this comment
- roostercogburn
  Posted on November 26, 2012 at 5:30pm
  Well, we are about to go off the cliff, watch the unemployment numbers go through the roof in the next couple months, I just herd today that Lockheed Martin is ready to let over 20,000 workers go, and G.E. is closing more plants in the U.S. so they can move to China and Mexico, guess the democrats got what they wanted, wait until the money runs out, it aint going to be a long wait.
  
  Report this comment
Bigmac1947
Posted on November 26, 2012 at 4:11pm
Congratulations to the Democrats and Young People! You now own it and you can’t blame Bush.
The next terrorist attack you own it.
Can’t get a job after graduation, you own it.
Sky rocketing energy prices due to Obama’s EPA shutting down the energy producing states, you own it.
A nuclear Iran, you own it.
Bowing to Russia, you own it.
Another severe recession, you own it.
A volatile border with Mexico, you own it.
Trouble getting good health care, you own it.
Higher health insurance costs and health care costs, you own it.
No budget, you own it.
Our allies mistrust, you own it.
Another trillion of debt, you own it.
More Benghazi situations, you own it.
No one willing to join the military, you own it.
Trouble getting a loan to buy a home, you own it.
More dependency on food stamps, you
own it.
Trouble finding good employment, you own it.
Several part time jobs instead of a good job, you own it.
A World Government, you own it.
The UN governing the United States instead of ourselves, you own it.
A Senate that will not bring any legislation to the table even if it is “Dead on Arrival”, you own it.
China controlling our world trade trampling all over us, you own it.
Loss of our freedoms as we have known it in the past, you own it.
A dictatorship instead of a democracy that follows the Constitution, you own it.
Less take home pay and higher living costs, you own it.
Driving a car that looks like a toy, you own it.
More government corruption and lies,

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- ArmedAndReallyPissed
  Posted on November 26, 2012 at 4:25pm
  But they do have an Obozo Phone and by God, they do own that !!!!!!
  
  Report this comment
- CWPrequired
  Posted on November 26, 2012 at 4:39pm
  True that one BigMac!
  
  Report this comment
- NHwinter
  Posted on November 26, 2012 at 4:45pm
  Well said BigMac.
  
  Report this comment
FalseFactBob
Posted on November 26, 2012 at 4:11pm
Fun Fact: The term Fiscal Cliff actualy came from the 1930s when the top banker of the time was named Cliff. He lived the life of a bachelor spending money on any thing and every thing he was very irresponsible fiscaly speaking. Despite what history teaches everyone in the know, acknowledges that Cliff single handidly caused the Great Depression with his poor fiscal choices. so when ever a country is handling their finances like Cliff did they say “beware the fiscal cliff”

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girlnurse
Posted on November 26, 2012 at 4:10pm
I wonder why there are no jobs in Amerika???
http://www.youtube.com/watch?v=5b_7y4KmlA0&feature=player_detailpage

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- progressiveslayer
  Posted on November 26, 2012 at 4:29pm
  It was a great video and the truth,problem is it’s an elderly white man giving the message and your typical simpleton obamazombie simply won’t listen to an elderly white man,they’ve been conditioned to believe that white males are the embodiment of evil and will reject the message outright. No what’s needed here is a young attractive black female to present that message,sad but true.
  
  Report this comment
- Snowleopard {gallery of cat folks}
  Posted on November 26, 2012 at 5:21pm
  @Progressive:
  
  Sad but true, people of this upcoming generation are indoctrinated for the most part on the lines of ‘government is father, mother, teacher, and all else’ while the older generations are being blamed for causing all the ills of the world.
  
  Obama will have one of two things occur – send us over the cliff so he can seize more power, or the Republicans will cave completely, and he seizes more power.
  
  The democrats will never stop until a communist system is imposed upon all of us.
  
  Report this comment
colascguy
Posted on November 26, 2012 at 4:09pm
(Rino from SC)Gramnesty has already said he will cave in on this. I say let him have everything he wants there is no point in fighting any more. I no longer see any difference between R and D under either we are going to hit a brick wall the question is doe we do it at 50mph or 150mph.

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- girlnurse
  Posted on November 26, 2012 at 4:19pm
  I vote 150…I want to get it over with..
  
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- GuruMeditation
  Posted on November 26, 2012 at 4:34pm
  I vote Mach2!
  
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- antiprogressive
  Posted on November 26, 2012 at 4:38pm
  me too.
  I hope the republicans merely vote “present” for the next 2 years and wait to see what happens.
  Don’t vote FOR anything – so you can’t be blamed for the consequences, and don’t vote AGAINST anything, so you can’t be called an obstructionist.
  
  We’ve been riding the edge long enough.
  
  Only hitting rock bottom can save us now.
  Maybe folks will realize it when we get there.
  
  And where’s that dang monster asteroid?
  Bring it on!!
  
  Report this comment
BlackCrow
Posted on November 26, 2012 at 4:06pm
There will be no deal. Why would the Communists make a deal when they get EVERYTHING they want by letting this disaster happen? They get their tax increases, defense cuts and inflict pain on the American people and get to blame the Republicans. Why make a deal? Its Lucy and the football.

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- progressiveslayer
  Posted on November 26, 2012 at 4:20pm
  You’re correct they’ll be no deal because the Marxist POS doesn’t have to make one,it doesn’t matter now because we’re way beyond fixing anything now. It’s been his plan all along to crash the system then use his civilian army to maintain control of us serfs.
  
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- RIGHTHOOK
  Posted on November 26, 2012 at 4:20pm
  It is Lucy and the football. Appropriate analogy. This 2nd term will take on a speed unlike the 1st term regarding how quickly and predictably Obama will transform the USA. Six months from now or possibly less you will no longer feel comfortable sitting in your own home. The realization that it will all be taken away will clearly have sunk in. Helplessness will replace independence. This is going to go very fast like a wicked cancer….
  
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- girlnurse
  Posted on November 26, 2012 at 4:25pm
  RIGHTHOOK: Yep I think you’re right..I think they’ll let us enjoy our “last Free Christmas” and then ASHTF!
  
  Report this comment
- GuruMeditation
  Posted on November 26, 2012 at 4:33pm
  http://www.foxnews.com/politics/2012/11/26/obama-warns-republican-rejecting-his-tax-offer-will-spoil-christmas-for/
  
  WTFE… His election alone ruined the next four Christmas’s IMHO.
  
  Report this comment
- GuruMeditation
  Posted on November 26, 2012 at 4:39pm
  and probably more than four. It may well be permanent.
  
  Report this comment
- Cavallo
  Posted on November 26, 2012 at 4:40pm
  @Girlnurse, if you think you are free now, you’ve got your head in the sand.
  
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- RIGHTHOOK
  Posted on November 26, 2012 at 4:43pm
  GIRLNURSE – I prefer to be positive albeit a realist which can be mistaken for a pessimist. His strong armed, fraudulent reelection and the loose talk about his seeking a 3rd term by which the ‘system’ has to be altered in order to award him that luxury along with his “other’ manipulative shenanigans has cause for serious concern. Of course he is not acting alone as you know. He is just the puppet behind an enormous machine of great proportions I suspect.
  
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- girlnurse
  Posted on November 26, 2012 at 8:21pm
  CAVALLO: I don’t think we’re free now…I just think its gonna get a heck of alot worse before MOST wake up!
  
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hatchetjob
Posted on November 26, 2012 at 4:00pm
It doesn’t matter as we are doomed in one way or another.

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- jblaze
  Posted on November 26, 2012 at 4:07pm
  Sad but true. There is only one hope its a good one, but there will be HELL to pay to get there.
  
  Report this comment
- gyro
  Posted on November 26, 2012 at 4:10pm
  well it maters but your right
  
  Report this comment

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