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Fiscal Cliff Scenarios Are Just That

The White House and Congressional Republicans continue to draw sharp lines on the fiscal cliff showdown coming after Election Day, even as business leaders warned of a big hit to the economy if scheduled tax increases and spending cuts are not muted.

President Barack Obama has vowed repeatedly to veto any deal that leaves in place Bush-era tax breaks for the highest earners — a fact highlighted again in a Washington Post story today. Congressional Democratic leaders have also been signaling less flexibility in recent weeks, though a few rank-and-file Democrats have hinted at compromise.

Some Republicans, preparing for the possibility that Obama is re-elected, are coming up with alternative scenarios to simply allowing the top tax rate to go back up to 39.6 percent. The Post’s Lori Montgomery reported one such scenario posed by policy analysts — keeping rates at 35 percent but raising $55 billion next year from high-income earners, perhaps by limiting their deductions. GOP presidential nominee Mitt Romney has floated a deduction cap as part of his own tax proposals. And the pot could possibly sweetened with a debt limit increase.

But any such idea is still a long way from becoming law; Republican and Democratic aides note that many people are still waiting to see how the election shakes out before laying their cards on the table.

One senior Senate Democratic aide dismissed the $55 billion scenario, saying the White House would drive the deal.

“If Obama wins, he’ll have a plan and he’ll push it hard on the Hill. If he loses, all bets are off,” the aide said.

A Republican leadership aide also dismissed the idea of a $55 billion plan, for now at any rate.

“We don’t know what plan that is or whose plan it is. We’re not proposing tax hikes and aren’t involved in that,” the GOP aide said.

But Republicans in recent weeks, including conservative Sen. Jim DeMint (S.C.), have acknowledged that Obama has the ability to force a tax increase by veto, which would be highly likely to be overridden.

A Hill Republican aide predicted there would be an effort to come together after the elections. “Nobody wants to be that guy that’s going to let us go off of the fiscal cliff. … The markets are going to start rattling,” the aide said.

That said, the GOP’s preferred position all along has been a one-year extension of existing income tax rates — though not payroll tax rates. Some still hold out hope that Obama and Congressional Democrats will cave on that issue if Romney wins, lest Obama preside over a massive tax increase just as he leaves office only to hand Romney the opportunity to quickly cut them.

But the Democratic justification for the fiscal cliff’s existence has been to force the GOP to agree to a tax increase, and the White House isn’t backing down.

“The president has long made clear he will veto an extension of tax cuts for the top 2 percent of Americans, wealthiest Americans,” Press Secretary Jay Carney said today. “That has been his position, as you know, for a very long time.”

But Carney acknowledged the tax issue is effectively on the ballot.

“Some of these disagreements will have to be resolved by the electorate, and that’s the disagreement over whether or not we need to give more tax cuts to millionaires and billionaires. The American people will decide that in this election,” he said.

Business Deal

The business community is starting to ramp up the pressure to get a deal.

The Financial Services Forum sent a letter to Obama and Congress today urging them to cut a deal to avert the fiscal cliff. The letter was signed by CEOs of the nation’s biggest financial firms.

Dirk Van Dongen, president of the National Association of Wholesaler-Distributors and a top fundraiser for Romney, said the business community is prepared to ramp up a push for tax reform after the elections.

“I think an accurate characterization of where the business lobby is: We’re prepared, we’re ready to the pull the levers of massive grass-roots mobilization, but the 80-20 in this whole exercise is the election,” he said.

But Van Dongen stressed that the business community clearly does not want to go over the cliff.

“I don’t think there is anybody in the business community who [believes] that doing nothing is a smart option,” Van Dongen said. “It’s a dumb option. It’ll have tremendous negative fallout in terms of the markets and the economy.”

Chris Whitcomb, tax counsel at the National Federation of Independent Business, also said business is focused on the elections.

“Like a lot of people, we are holding our breath to see what happens after Election Day. Nothing’s happening until after then. Our position is to extend all the current rates and current law,” Whitcomb said. “It’s important to extend current policy for a year so that those hard questions can be dealt with in a proper manner.”

Talking Tough

Senate Democratic leaders have been ratcheting up their tax rhetoric of late.

Last week, Senate Democratic Conference Vice Chairman Charles Schumer (N.Y.) held a press conference to say that tax reform should be implemented without lowering tax rates for the highest earners.

That would break from the precedent set by tax reform in the 1980s and undercut considerations of the Senate’s bipartisan “gang of six,” which met last week in Virginia with deficit reduction champions Erskine Bowles and Alan Simpson.

“Our needs today are different compared to 1986, and we cannot take the same approach we did then. We must reduce the deficit, which is strangling our economic growth. And we must seek to control the rise in income inequality, which is hollowing out the middle class,” Schumer said Tuesday. “The 1986 model would be ineffective — if not counterproductive — to solving these two challenges.”

Though Schumer drew a lot of attention for seemingly breaking with convention, his remarks at the National Press Club were not unlike earlier hardball speeches delivered this summer, including one from former supercommittee Chairwoman Patty Murray (D-Wash.).

“We absolutely need to reform the tax code,” she said in a July address to the Brookings Institution. “It’s badly broken. And I am certainly willing to discuss a fast-track process for getting that done. But there is absolutely no reason — not one — that we need to extend the tax cuts for the rich as a precondition for reforming the tax code,” the No. 4 Senate Democrat said. “Republicans are going to have to accept that tax reform isn’t going to be a backdoor way for them sneak through more tax cuts for the rich. And it is going to have to raise revenue to help rein in the deficit and debt.”

Murray has also made it clear that she’s ready to go over the cliff to force Republicans to the table on taxes, noting that any bill that passed next year after the Bush tax rates expire would be a tax cut.

Kate Ackley and Meredith Shiner contributed to this report.

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