Washington Tackles the “Budgetary Wall”

After Thanksgiving, the American Congress returns to Washington on Monday to negotiate an historic agreement on the deficit with Barack Obama, which could see the Republicans accepting, in a roundabout way, an increase in taxes on the rich for the first time.

There are 37 days until Jan. 2 and the triggering of the “budgetary wall” (or “fiscal cliff”), an automatic law that will cause the revenue tax to jump for all Americans, even the poorest and the budget for all departments to be reduced, even that of the sacred Defense Department. This sharp adjustment, established to restructure the budgetary situation, could return the country to recession.

To avoid these indiscriminate measures, Washington wants to develop a plan to reduce the equivalent amount of debt, but make it more balanced.

Thus, Democrats and Republicans are increasing their creativity to find savings of at least $1.2 billion by 2021 while staying loyal to their campaign promises.

The task is crucial to the reestablishment of the credibility of American credit, facing a seven percent deficit of the gross domestic product (GDP) in 2012 and a record debt of $16.29 billion (108 percent of the GDP). The 2012 federal budget, $3.8 billion, represents 24.3 percent of the GDP, a the highest proportion since World War II.

So Barack Obama has sworn it: there will be no agreement without an increase in taxes for the wealthiest two percent of American households, making more than $250,000 per year (194,000 Euros).

The Retirement Age Could Change

The Republican’s response to Obama: there will be no agreement if the tax rate for the wealthiest increases. They demand downsizing the breadth of the federal state.

The devil is in the details, because with a little ingenuity, the fiscal code offers multiple ways to put the two camps in agreement without touching the tax rates.

The speaker of the House of Representatives, Republican John Boehner, supports an overall increase of tax revenues, a position confirmed at the first meeting with Barack Obama on Nov. 16.

“It’s fair to ask my party to put revenue on the table. We’re below historic averages. I will not raise tax rates to do it. I will cap deductions,” declared Republican Senator Lindsey Graham Sunday morning on ABC.

This idea, already suggested by Mitt Romney, Barack Obama’s opponent in the presidential election, seems to have gained popularity with Republicans who have signed a symbolic “pledge” from the influential conservative Grover Norquist to never increase taxes. Capping the tax loopholes allows them to save face while using the backdoor to increase taxes.

In exchange, Republicans demand a reform of the social security system and the public health care for the elderly (Medicare). Senator Graham suggests pushing the age of full retirement beyond the current 67 years and the age for access to Medicare to 67 years instead of 65.

Democrats, like the powerful Senator Dick Durbin, are ready to reform these programs, but “making sure that the beneficiaries are not paying the price for it, except perhaps the high-income beneficiaries,” as Durbin declared Sunday on CNN.

According to Roberton Williams, expert at the Tax Policy Center, the elected could sign a “small compromise” in December, such as increasing certain taxes and reducing certain expenses for one year. The great 10 year agreement will be reached during the year 2013.

But Washington has already started to cut spending, notes the Center on Budget and Policy Priorities. In 2011, Congress set in stone $1.5 billion of budgetary cuts in 10 years, with respect to 2010. The $1.2 billion of planned reductions via the “cliff” are in addition to these cuts that are already planned.