Georgia Senator Johnny Isakson said Congress will avert an end-of-the-year fiscal collision of automatic spending cuts and tax increases that could trigger a recession in 2013.
Isakson, a Republican, predicted lawmakers will strike a last-minute deal in the session of Congress following the Nov. 6 election to extend the income tax cuts first enacted under former President George W. Bush and put off at least part of the spending reductions in federal programs. The automatic cuts, half of which will affect defense, are set to start in January.
“I don’t think we’re going off that cliff,” Isakson said at a breakfast with Bloomberg reporters and editors in New York City. “When it’s 48 hours from going home for Christmas we can do about anything.”
A 2011 deficit-reduction agreement between President Barack Obama and congressional leaders created the so-called fiscal cliff of $607 billion in spending cuts and tax increases starting in January unless Congress acts to stop it.
Within the next 14 months, Congress must reach a broader compromise to tackle the nation’s debt, with spending cuts and revenue from “cleaning up the tax code,” Isakson said.
“The current code we have was passed in 1986 and decorated like a Christmas tree for 27 years,” he said.
Republicans and Democrats are far apart on a broader agreement on taxes.
Republicans want the Bush-era tax cuts, scheduled to expire at the end of this year, to be extended for everyone. Democrats want top earners to pay more. The only way to reach a deal is through a tax overhaul that lowers income tax rates and ends often-used deductions and credits, said Isakson.
“You’ve got to have the intestinal fortitude to put everything on the table,” he said. “And I do mean everything.”
“We can’t get there any other way,” he said. “If you just take one tax treatment and say ‘I’m going to repeal it,’ you don’t get a solution to your problem.”
Isakson cited some of the most-used tax breaks including those for mortgage interest, charitable giving and employer-provided health care, without specifying whether he would support a net increase in tax revenue through such changes.
On entitlements, Isakson said charging wealthier seniors more for their Medicare co-payments, known as means-testing, was one proposal that may gain bipartisan support.
Isakson, who voted for the 2011 budget law that created the automatic spending cuts, also said it’s clear the legislation hasn’t forced Congress to strike a broader deal on curbing the debt.
“I thought it was such a great poison pill that nobody in their right mind would swallow it,” he said. Instead of forcing a deal, as Congress intended, the spending cuts will probably be delayed, said Isakson.
“The solution is going to be some kind of deadline next year for Congress to cut $1.2 trillion,” or Congress will assign federal agencies to make specific cuts, he said.
During an Oct. 22 presidential debate, Obama said the automatic spending cuts “will not happen.”
Threat of Cuts
Isakson said the White House has played down those remarks because Democrats want to use the threat of spending cuts to press Republicans to agree to higher tax rates. Many Republicans have expressed concern that the cuts would cut too deeply into defense programs.
“That’s a bargaining chip for the lame-duck session that all of a sudden slipped off the table” because of Obama’s remarks, Isakson said. “By his inferring that wasn’t going to happen it lessened negotiations on the tax rate issue.”
Isakson, who has criticized the role of subprime lending in the collapse in the housing market, said that even with the Dodd-Frank Wall Street regulation changes, U.S. banks are getting bigger and smaller banks are unable to compete.
“The biggest mistake I probably made in my career in Congress was voting to repeal the firewalls that existed in the financial mechanisms,” he said.
In 1999, Congress eliminated Depression-era restrictions on combining commercial banking, investment banking and insurance businesses into a single company. Unlike some former bank executives, such as former Citigroup Inc. Co-Chief Executive Officers John Reed and Sandy Weill, Isakson said he believes it would be too hard to try to reinstate those restrictions now.