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13 November, 2012

At the edge of the cliff again

BRP Bhaskar
Gulf Today

President Barack Obama’s hard-won second term does not begin until January 21, 2013 but he has a lot to do before that to make sure that his presidency and the US economy have smooth sailing during the next four years.

He was able to register a facile win over his Republican opponent, Mitt Romney, thanks to the success of the strategy his team had worked out to take the swing states with the help of the young, the women and minority groups. However, the ghosts that Romney raised have not been laid to rest. With the Republicans still controlling the House of Representatives, which has a key role in fiscal matters, he needs to find ways to break the political gridlock which held up his tax reform proposals during the last four years.

Although the fluid situation in the Middle East too demands immediate attention, at the moment Obama’s main worry must be the economy since the country is poised on the edge of the “fiscal cliff”, a catchphrase describing the situation that will arise on January 1 when taxes are due to go up across the board following the expiry of more than a dozen legislative measures which have held them down so far. Some of these measures go back to the days of George W Bush. They were due to expire in 2010 but were extended by two more years.

It has been estimated that if the Congress does not act in time 90 per cent of US households will have to pay higher taxes, the additional burden being an average of $3,500. The administration will be forced to impose a budget cut of $530 billion, half of it in the Defence department. Mandated spending cuts will throw out of job 277,000 federal employees, which is 14 per cent of the total. The unemployment rate will soar and the economy will go into recession.

With the national debt at $16 trillion, further growth of the budget deficit, which now stands at $1.09 trillion, can harm the economy. This must worry the rest of the world, too, since a recession in the US will throw out of gear the efforts to revitalise the global economy.

Obama has long advocated tax reforms which will provide relief to the middle class and raise the burden on the wealthiest. The House majority does not share his vision. Post-election comments of Speaker John Boehner indicate that the Republicans are in an unrelenting mood.

Obama seeks to invoke his election victory to further his plan, saying the people have voted for action, not politics. Boehner counters that if there has been a mandate it is for the two parties to work together. Exit poll results back Obama’s claim. They show that more than 60 per cent of the voters endorse his tax plan.

The president wants a tax law that will provide relief to middle class people (defined as individuals earning less than $200,000 a year and couples earning less than $250,000). He claims it will benefit 98 per cent of American citizens and 97 per cent of the small businesses. He wants progressive rise in tax on higher incomes. Boehner wants the Bush era tax cuts, which benefited the affluent, to continue.

Customarily presidents rely on party colleagues in the Congress to negotiate with opposition leaders and work out formulas acceptable to both the parties. Obama’s invitation to Boehner and other congressional leaders to the White House this week appears to indicate that he plans to take things into his own hands. The Wall Street bigwigs who funded the Romney campaign liberally are keeping a nervous watch on the developments.

Considering the rigidity the Republicans are publicly displaying it is doubtful if Obama can get the House to adopt the kind of tax bill he has in mind. They want him to revise the definition of the middle class to include those with incomes of up to $500,000. They also want him to abandon thoughts of raising the tax on the rich and stop with ending some tax benefits they now enjoy. He is unlikely to find doing away with minor benefits such as breaks for corporate jets and oil industry manufacturing credit an adequate substitute for his plan.

  • In the circumstances, the two sides may once again settle for a temporary solution. That will mean postponing the evil day.--Gulf Today, Sharjah, November 13, 2012.

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