U.S. Republican lawmakers advocated raising federal tax revenue by limiting deductions rather than by raising rates to avert the so-called fiscal cliff, as Democrats pushed for higher rates on upper-income earners.
“I would be very much opposed to raising tax rates, but I do believe that we can close a lot of loopholes,” including limits on how much people can deduct for charitable giving and home mortgage interest payments, Senator John McCain, an Arizona Republican, said yesterday on “Fox News Sunday.”
Senator Richard Durbin of Illinois, the second-ranking Democrat in the chamber, said any deal to reduce budget deficits should allow the top tax rate on ordinary income to rise to 39.6 percent from 35 percent.
“Let the rates go up to 39 percent. Let us also take a look at the deductions. Let’s make sure that revenue is an integral part of deficit reduction,” Durbin said yesterday on ABC’s “This Week.”
Democratic President Barack Obama and congressional leaders are trying to find a compromise in the next few weeks to avoid the fiscal cliff, which would trigger $607 billion in tax increases and spending cuts beginning in January.
The Congressional Budget Office has said failure to avoid the fiscal cliff could lead to a recession and a jobless rate of about 9 percent, compared with the October rate of 7.9 percent. Federal Reserve Chairman Ben S. Bernanke said Nov. 20 that the fiscal cliff would pose a “substantial threat” to the economic recovery.
Both the Obama administration and business leaders are warning that the fiscal cliff creates uncertainty for consumers and employers.
Congress should at least pass extensions now of middle- class tax breaks, which have bipartisan support, according to a report released today by the president’s senior economic advisers.
Without the middle-class cuts, consumers may spend almost $200 billion less next year, weakening economic confidence as the holiday shopping season begins, the report said.
Congress “will be risking one of the key contributors to growth and jobs in our economy at the most important time of the year for retail stores,” according to the report.
Higher taxes on the middle class and a failure to prevent the alternative minimum tax from expanding may cut an increase in real consumer spending by 1.7 percentage points in 2013, the report said.
The spending slowdown already is occurring, said Matthew Shay, the president of the National Retail Federation.
Consumers are “not spending as robustly as they would because they still don’t know what’s going to happen,” he said on Fox.
“It’s very clear” that business executives “are thinking about what’s going on in the economy and what might happen next year, before they make those capital investments,” Shay said.
Americans “are looking for clarity so that they can make the decisions” about spending, John Sweeney, executive vice president of planning and advisory services at Fidelity Investments, said on Fox.
“There’s a great uncertainty that’s just hanging over the entire economy because we’re not confident that our guys can govern anymore,” David Cote, chief executive officer of Honeywell International Inc. (HON), said yesterday on NBC’s “Meet the Press.”
“There’s a lot of money on the sidelines that people are willing to invest,” Cote said. “People like me just aren’t hiring now because we’re not confident they can do it.”
The spending cuts are evenly divided between domestic and military spending. The tax cuts, enacted under President George W. Bush in 2001 and 2003, expire at the end of the year.
U.S. stocks had their biggest rally since June last week amid optimism that Obama and Republicans can reach a deal.
The markets “should be optimistic, because we can solve this problem,” Durbin said.
Obama won re-election Nov. 6 on a platform that included higher rates for wealthier taxpayers. He wants to extend the Bush-era tax cuts for most taxpayers, while letting them expire for individual income of more than $200,000 a year and married couples’ income over $250,000.
The Democratic-controlled Senate in July passed a bill containing those provisions. The Republican-led House opposes it.
“It’s a bipartisan bill the House should pass to make sure that we go forward with these negotiations without this specter of tax increases for working families,” Durbin said.
Republicans, who also lost ground in the Senate and House in the elections, generally support extending the Bush-era tax cuts for all income levels. They say Obama needs to show more leadership on curbing spending, including changes to entitlement programs such as Medicare.
Even as Republicans oppose raising tax rates, some have distanced themselves from a pledge they made with the group Americans for Tax Reform to oppose all tax increases and to use any revenue from limiting tax breaks to reduce tax rates.
Senator Lindsey Graham, a South Carolina Republican, said on the ABC program that he “will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.”
“I care more about my country that I do about a 20-year- old pledge,” Senator Saxby Chambliss, a Georgia Republican seeking a bipartisan deficit reduction plan, told a Georgia television station on Nov. 21.
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