This article will consist of two parts. The first one will address the meaning of and the issues surrounding the fiscal cliff and provisions put forth by the president and Republicans for a compromise for legislation by December 31 to avert the fiscal cliff.  Part two will address the possible consequences and effects on taxpayers, business, investors, the stock market, and the economy if legislation is not passed by December 31.

The acronym “fiscal cliff” refers to substantial cuts in government spending starting on January 1, 2013 and tax rate increases because the Bush tax cuts expire on December 31. Unless President Obama and Congress reach a compromise before the end of the year and Congress passes legislation, the U.S. will go over the fiscal cliff. In summer 2011, the “Simpson-Bowles Deficit Reduction Commission” (made up of Republicans and Democrats from the House and Senate) was formed by the president.  Its goal was to come up with a plan and legislation to reduce the federal deficit.  After several months of  hearings and debate, the Commission could not come to a consensus spending reductions to achieve meaningful deficit reduction.  Instead, it passed a binding resolution that on January 1, 2013, federal spending had to be cut substantially across the board.  The programs to be hardest hit are defense, unemployment, and infrastructure.  Other programs will also see reduced spending but not to the extent of the preceding ones.  If a compromise is not reached by the end of the year, tax rates for all taxpayers on all types of income will substantially increase.

Part 1 will discuss the ongoing discussion between the president and Republicans, primarily House Speaker John Boehner, to reach a compromise by December 31.

The president has been re-elected, the Republicans maintain control of the House, and the Democrats maintain control of the Senate but Republicans suffered losses in the House and Senate. Due to these losses, “. . . the president now believes he has the upper hand to drive a hard bargain, one that includes tax increases on upper income Americans” [Janet Hook and Carol E. Lee, “Less tension This Time for Obama, Mr. Boehner”, The Wall Street Journal, November 16, 2012].

If a compromise is not reached by December 31, tax rates will substantially increase for all taxpayers on ordinary income, dividends, and long-term capital gains. A compromise may include reductions of itemized deductions that could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.  No one knows for sure how the tax law will be different in 2013. It depends on what kind of compromise occurs between the president, the House and Senate. and  Mr. Boehner (R, OH) and Senate Minority Leader Mitch McConnell (R, KY) have stated they will not stand for any tax increases. Republicans want revenue enhancement. This attempts to raise revenue by cutting loopholes and limits on overall and specific deductions and credits. The president, Senate Majority Leader Harry Reid (D, NV), and House Minority Leader Nancy Pelosi (D, CA) are adamant about not allowing any tax cuts on wealthy taxpayers (defined by the president as taxpayers with income higher than $200,000 ($250,000 for married filing joint).  The president campaigned on raising taxes on the wealthy.  Many commentators, including this writer, believe that these income levels do not represent wealthy taxpayers.  This level of income is earned by many middle class taxpayers, and small business who are self-employed or operate their business as an S corporation. This is a small business corporation that is limited to 100 shareholders and the corporation does not pay an income tax. Shareholders report their share of the corporation’s income on their personal form 1040 and pay self-employment tax on the income.

Some of the more popular and important tax provisions that will expire on December 31 are:

(1)  the 10% individual tax rate.

(2)  the 15% maximum tax on long-term capital gains and dividends for those in the 15% and higher tax bracket.

(3)  the increased standard deduction for married filing joint

(4)  the exclusion from income of the discharge of debt on a principal residence

(5)  certain advantageous student loan interest deductions.

(6)  the American Opportunity tax credit for the first two years of college tuition

(7) doctors who treat medicare patients face a 28% cut in payments

(8)  the 2012 patch which raised the income level before the alternative minimum tax (AMT) kicks in. This is an additional tax imposed on certain high income taxpayers.  The AMT is not indexed for inflation. As a result, the IRS estimates that the number of taxpayers affected by the AMT will increase from15 to 30 million and if a law is not passed before the end of the year it will have to reprogram its computers and refunds for those affected by the AMT will be delayed until mid March.

(9)  charitable gifts, up to $100,000, from an IRA (only allowed for those 70 ½ or older). This  results in no income but a charitable deduction is not allowed.

In addition to the above, the tax rate on long-term capital gains (securities held longer than one year) could increase from15% to 29% and the rate on dividends, from15% to an effective rate of 44.6%. The social security tax on employers and self-employed will increase and the federal estate tax rate will increase from 35% to 55% and the exclusion amount will drop from $5,120,000 to $1,000,000.  Also, a new 3.8 percent surtax on “net investment income” is going into effect January 1, 2013 for taxpayers with income of $200,000 ($250,000 married filing joint). [I have posted two articles on this subject.  One is the proposed regulations released by the IRS that deal with how the tax will be administered. The second article discusses planning for the tax].

President Obama and Treasury Secretary Timothy Geithner said they “don’t see any alternative to raising taxes on the over $200,000 crowd-if the deficit is to be reduced without eviscerating government programs or raising taxes on the middle class” [David Wessel, “Stage Set For Next Act in Fiscal Drama”, The Wall Street Journal, November 15, 2012].

Republicans want to use revenue enhancers by reducing overall or specific deductions and credits for wealthy taxpayers.  David Wessel, writing in The Wall Street Journal, said:

When it comes to the top 2%.  . . . what I [President Obama] am not going to do is to extend further a tax cut for folks who don’t need it which would cost close to a trillion dollars.  And it is very difficult to see how you make up the trillion dollars.  . . . you know the math tends not to work.”  For now, Mr, Geithner says it simply isn’t enough money. This is about half of what Mr. Obama is seeking-to bring the deficit to prudent levels while awaiting higher taxes on the middle class as well as spending cuts deeper than Mr. Obama will accept [“Stage Set For Next Act In the Fiscal Cliff Drama”, November 15, 2012].

Republicans say they are open to revenue increases but the president also has to agree to reduce entitlement spending, particularly in massive Medicare and Medicaid programs. The president’s spokesman, Jay Carney, said the president is open to discussions about strengthening Social Security but the president does not want to address these programs as part of the fiscal cliff discussions, but rather as part of a separate issue because Social Security is not contributing to the deficit [“Deal Distant as Cliff Nears”, Associated Press, Albany Times Union, November 26, 2012].

One commentator, James Baker 111, Treasury Secretary under President George H. W. Bush, believes Congress should wait until 2013 to deal with the fiscal cliff. He said:

it is unrealistic to think that Congress could negotiate a far-reaching ‘grand bargain’ during its brief lame duck session this winter. Lawmakers’ first order of business, then, should be to postpone all elements of the January 1 fiscal cliff. . . for three months until March 31.  This would provide Washington enough time to negotiate a responsible compromise. To accomplish this would be to establish a mechanism guaranteeing that any agreed-upon spending cuts actually happen and then remain in place after taxes are raised.  I propose an enforcement mechanism linking the revenue increases and spending cuts that make up the grand bargain. The parties would agree to cap federal spending at a certain percent of gross domestic product. Were a future Congress to increase spending above that cap, then the tax increases would automatically be rescinded. Conversely, should future Congresses keep spending at or below the cap, then the tax increases would stay in place (unless a future Congress were to raise or lower taxes without increasing the debt). Any effort to increase revenues should first focus on broadening the tax base rather than raising marginal tax rates” [“How to Get to a Grand Bargain” The Wall Street Journal, November 16, 2012].

President Obama’s Tentative Tax Plans (Kiplinger’s Monthly Tax Letter, October 2012).

Individuals

1. Reduce tax rates across the board by 20%, except for taxpayers with income above $200,000 ($250,000 married filing joint).

2.  For taxpayers with income above $200,000 ($250,000 married filing joint), the following are proposed:

(a) Tax rates on ordinary income will increase from 33% to 36% and from 35% to 39.6%.
(b) The tax rate on long-term capital gains will increase from 15% to 20%.
(c) Municipal bond interest that is presently tax free will be partially taxable.
(d) Employees above the 28% tax bracket will be taxed at 11.6% on the part of the premiums employers pay for their health care.
(e) Limitations on all deductions plus limits on specific deductions for student loan interest, self-employed health insurance premiums, payments to IRA and 401K retirement plans, and health savings accounts. If you have not made or contributed the maximum for 2012, you have until April 15, 2013 to make a contribution for 2012. If you make the contribution for 2012 in 2013, be sure to put in writing that the contribution is for 2012.

There may be other changes depending what tax legislation is finally passed.

Business

(a) Reduce the top corporate tax rate from 35% to 28%
(b) Make the research and development tax credit permanent.
(c) Allow asset purchases up to $1 million to be expensed in the year of purchase instead of being written off over some time period. This will likely be subject to certain restrictions
(d) Increase the depreciable life for some assets.
(e) Raise the allowable ceiling from $5 million to $10 million for the cash basis accounting method.

There may be other changes depending what tax legislation is finally passed.

The president’s re-election is a chance to improve the tax code as part of talks to resolve the looming fiscal cliff, according to two former Treasury secretaries, Paul O’Neill and Robert Rubin. In an interview on CNN’s Fareed Zakaria GPS  program. O’Neill, a former chief executive officer of Alcoa Inc, stated “debt talks and the president’s win provide a ‘re-start’ and an opportunity for him to educate the  people and lead us in the direction we need to go. It’s the single most important thing you could do. Obama shouldn’t focus at all on the Republicans. I think he ought to focus on the American people in seeking a deficit solution.”  Rubin said “Obama could begin by educating  people about the tax gap, an estimated $400 billion in uncollected taxes each year, and by starting  with a  blank page in overhauling the tax code. A value-added tax, which would replace  corporate, individual and payroll levies, would be one possible solution.”

The president’s Treasury Secretary Tim Geithner and congressional leaders started a new round of deficit-reduction talks in a bid to avoid the fiscal cliff, the combination of $607 billion of tax increases and spending cuts that threatens to throw the country into a recession next year.  In an interview with Bloomberg News, Geithner said:

an agreement could be reached within several weeks. A deficit deal would increase business confidence significantly because right now there’s great uncertainty about future policies and future economic conditions, and because there’s a real concern about whether our government can function. It’s the single most important thing you could do. A tax overhaul could be structured to have a short-term stimulus to the economy, making it more attractive to lawmakers and the public. Now is the time to make a deal to  avoid the becoming like Europe, where debt crises in Greece, Italy and other nations are roiling markets.

Many commentators believe the president doesn’t care if the U.S. goes over the cliff. This way, if the economy goes into a recession, he can blame the Republicans for refusing to agree to tax increases on the wealthy. The president told Bloomberg Television “one way out of the impasse would be to raise tax rates on upper income Americans in the short-term but bring them down in the long-run.    . . . then let’s set up a process with time certain, at the end of 2013 or the fall of 2014, where we work on tax reform.   .  .  . It is possible that we may be able to lower rates by broadening the base at that point.”  Some top Democrats are having doubts among themselves, over entitlements. They say these, particularly Social Security, should not be part of a deficit reduction deal. Representative Steny (D, Md), the second ranking House Democrat, said: “his party must be ready to consider changes including raising the Medicare eligibility age and slowing cost-of-living increases for Social Security”.  [Natali Bendavid, Carl E. Lee, Siobhan Hughes, Sara Murray, Corey Boles, and Michael Crittenden, “Mr. Boehner’s Plan Irks Conservatives”, The Wall Street Journal, December 5, 2012].

Other Republicans, in the House and Senate, are calling for compromises on tax rates and spending. Representative Steve LaTourette (R, OH). said he and others proposed legislation to raise taxes and reduce spending.  He has collected 100 co-signers on a letter to back that approach. Senator Susan Collins (R, MN), is soliciting support for a 2% surtax on income over $1 million but she would exclude small business owners. Tom Coburn (R,OK), said he would prefer to raise taxes on upper-bracket taxpayers instead of imposing limits on deductions.  [Janet Hook, Peter Nichols, and Carol E. Lee, “Some See Hope As Talks Resume Over Fiscal Cliff”, Albany Times Union, December 7, 2012].

Charles Krauthammer, a syndicated columnist and political analyst for Fox News, said:  the president’s strategy has nothing to do with economics or real fiscal reform.  This is entirely about politics. The fiscal cliff negotiations are designed to break the Republicans and grant himpolitical supremacy, something he thinks he earned with his 2.8-point margin victory on election day. This is why he sent Treasury Secretary Tim Geithner to the Republicans to convey, not a negotiating offer, but a demand for unconditional surrender.   . . . Obama’s objective in these negotiations is  . . . to fracture the Republican majority in the House, get Mr. Boehner to cave, pass the tax hike with Democratic votes provided by Minority Leader Nancy Pelosi, and fashion the entitlement state of his liking. This is partisan zero-sum politics, nothing more.  Obama has never shown interest in genuine deficit reduction.  He does nothing for two years, then spends the next two years ignoring his own debt-reduction commission [Simpson-Bowles].  In less than four years, he has increased U.S. public debt by a staggering 83 percent [“Another Obama Power Play”, Albany Times Union December 10, 2012].

Many freshmen Republicans are refusing to sign Grover Norquist’s pledge not to raise taxes and resisting Mr. Boehner’s efforts to reduce tax rates on the wealthy.  As a result, Mr. Boehner has removed them from key House committees.

The president also wants to power to raise the debt ceiling without approval from Congress but Congress still maintains the power to over ride it by a 2/3 vote of both the House and Senate.  Mr. Boehner said there is no way this going to happen. Both parties are opposed to it and will not be allowed by Congress.

Time is running out for the White House and congressional leaders to reach a deal to avert the fiscal cliff.  With written proposals from both sides now on the table, senior aides say the elements of a deal are coming into focus:

(1)  Fresh tax revenue, generated in part by raising rates on the wealthy, as Obama wants, and in part by limiting their deductions, as Republicans prefer. The top rate could be held below 39.6 percent, or the definition of the wealthy could be shifted to include those making more than $375,000 or $500,000, rather than $250,000 as Obama has proposed. Obama wants $1.6 trillion over the next decade, but many Democrats privately say they would settle for $1.2 trillion.  Mr. Boehner has offered $800 billion, and Republicans are eager to keep the final tax figure under $1 trillion, noting that a measure to raise taxes on the rich passed by the Senate this summer would generate only $831 billion.

(2)  Additional savings sufficient to postpone roughly $100 billion in across-the-board agency cuts set to hit in 2013, known as the sequester, and to match a debt-limit increase. The sequester, perhaps paired with an automatic tax hike, could then serve as a new deadline, probably sometime next fall, for wringing additional revenue from the tax code and more savings from entitlement programs.  [The Post’s Lori Montgomery and Paul Kane Report]

Wonkblog’s, Ezra Klein, looks at where things actually stand in the cliff talks:

(1)  For the White House, the key to any deal is tax revenues — delivered at least partly through higher rates — and a long-term solution to the debt ceiling.  Additionally, any big deal will have to include some stimulus, including an extension of unemployment insurance and either an extension of — or more likely, a replacement for — the payroll tax cut.

(2)  For Republicans, the key is some give on tax rates, as well as a few high-profile entitlement cuts, namely an increase in the Medicare eligibility age and chained-CPI. It’s by no means certain the two sides will come to a “grand bargain” before the end of the year. But if they do, the bargain will likely include either those policies outright, or instructions for Congress to work on those policies over the coming months.

(3)  Any deal will likely include more than those top-line items. It will also include deficit-reduction and tax reform targets for Congress to hit in the coming months. That gets to a deeper problem in the negotiations: When you drill down to the granular policy level, Republicans aren’t sure what they want. Democrats complain that the Republican offers are bare of policy detail. They lay down targets — say, $600 billion in health savings — but say nothing about how those targets will be achieved. Republican staffers admit that they need more time to come up with specific cuts — and, for that matter, specific tax reforms. But they argue they’ll have that time. Any deal is expected to include a two-stage process: Targets for spending cuts and tax revenues now, combined with consequences that force Congress to hit those targets later.  www.washingtonpost.com

Former Republican New York City mayor Rudy Guliani, on December 5, appearing on Fox News On The Record said “Instead of raising taxes, put caps on all or specific deductions and credits. This would raise the same amount of revenue.  I would not trust the president to raise taxes now and then agree to tax cuts a year from now.”

Even though Obama is determined to raise tax rates on the wealthy, Republicans can still make it tough on him to achieve everything he wants and hurt him in the long-run. An editorial in The Wall Street Journal said:

It’s certainly true that Republicans can’t stop a tax rate increase if Mr. Obama is determined to make it happen. The Bush-era tax rates automatically go up January 1, and the House can’t extend them alone.  But Mr. Obama also can’t get what he wants without House Republicans. He needs their votes to extend cuts for lower-income taxpayers, as well as to prevent the AMT from hitting 27 million taxpayers.  Most of those new AMT taxpayers live in high-tax Democratic states. Meanwhile, the death [estate] tax rate reverts to 55% and a $1 million exemption. Senate Democrats, running for re-election in 2014 won’t want that on their resume. . . .

Mr. Obama knows a budget failure would do enormous harm to his chances of second term success. It would guarantee at least two more years of trench budget warfare and poison the chances of immigration or other reform.  A good start would be for the House to pass the same bill again on January 3. Such resolve would show some leadership and demonstrate that Republicans are prepared to let the spending cuts sequester begin to take place if he won’t negotiate over spending in good faith.

Mr. Boehner and Republicans can also make clear to the voters that if Mr. Obama wants to jump off the “fiscal cliff”, he can always instruct the IRS not to change the tax withholding tables pending further negotiations. And he can instruct the Pentagon to exercise flexibility in the way it implements the automatic spending cuts.

Republicans need not play along, and they and the country will suffer if they do.  Above all, they need to start negotiating as a team with Mr. Obama and stop making premature concessions for the TV cameras that only make the White House less likely to meet them half way [“The Republican Tax Panic”, December 10, 2012].

On December 6, Sean Hannity, host of Fox News Hannity, gave some advice to the Republicans in negotiating with the president. He said:

Mr. Boehner must not give in to the president or bicker with other Republicans because this would only reiterate Obama’s inflexibility and cause a big fight within the Republican party and conservatism.  If we go over the fiscal cliff, there can’t be a blank check for Obama.  Remember their hand is stronger than they think and they can control spending. It is immoral to steal from future generations without controlled spending and record debt.

On December 6,  David Crumbach, author of the book The Great Destroyer [a reference to president Obama], appearing on Fox News Hannity stated:

Obama is not negotiating but posturing and bullying and refusing to put forth a plan to cut spending and reform entitlements. Without such a plan, we will go bankrupt. Obama is a bully, inflexible, and makes demands the GOP can’t accept because his demeanor involves spending increases not tax decreases on 2% of people . . . .   The top 2% of taxpayers already pay the highest rates and 40% of taxes and are doing more than their fair share. Increasing  taxes will not put a dent inc the size of the national debt. The president wants to raise taxes, not reduce spending.

After several years of clamoring that the Bush tax cuts only helped the wealthy, Wall Street bankers, and big corporations, the president has suddenly reversed his views and now says these tax cuts are vital for middle class taxpayers. “Perhaps the American people will accept this new Obama story line.  If so, it will be because after years of assailing the GOP as the party of the plutocracy, this is the first time the American people have heard Mr. Obama or any Democrat in the party leadership, concede that the Bush tax cuts benefited anyone save the uber-wealthy. Tax cuts for the rich came at the expense of the wealthy” [William NcGurn, “Obama’s Middle Class Tax Flip”, The Wall Street Journal, December 10, 2012].

Some Democrats also hold this view-point.  House Minority Leader Nancy Pelosi (R, CA) at various times has spoken of the “Bush tax cuts for the super rich, of Republicans taking  food out of the mouths of children to give tax cuts to Americans wealthiest, of how Republicans were using tax cuts paid by the middle class Americans to pay for tax breaks for ‘millionaires.’  . . . the clock is ticking on the fate of the Bush tax cuts for the middle class”  [William NcGurn, “Obama’s Middle Class Tax Flip”, The Wall Street Journal, December 10, 2012].

Senator Harry Reid (D, NV). Senate Majority Leader, said Republicans  “drew up their programs to benefit the very very very [sic] few and eliminate the majority from any-yes any-benefit of these tax cuts.  It’s really important that this holiday season the middle class is not going to be burdened with the thought that they may get a $2,200 a year tax increase”  [William NcGurn, “Obama’s Middle Class Tax Flip”, The Wall Street Journal, December 10, 2012].

Many taxpayers that voted for Obama have changed their mind about how to deal with the fiscal cliff.  Fox News, on December 10-11, polled registered voters nationwide and asked them two questions regarding the fiscal cliff compromise [reported on Fox News The O’ Reilly Factor, December 12, 2012].

(1)  What is the best way to deal with the country’s budget problems?  57% favor cuts in government spending, 20% favor tax increases, and 18% favor both.

(2)  If income taxes increase, what will the president do with these revenues?  36% said reduce the deficit, 53% said more spending, and 4% said both.

On  December 6-9, NBC  News and the Wall Street Journal sponsored a nationwide poll of registered voters.  It was conducted by the polling organizations of Peter D. Hart and Bill McInturff. It asked whether voters in November gave the president a mandate on:

		Reply
		No	Yes
1	Extending the Bush tax cuts for those earning less than $200,000 ($250,000 filing  joint) a year.	28	68
2	Reducing the deficit by raising taxes on the wealthy and reduce spending.	30	65
3	Eliminating Bush tax cuts for those earning more than $200,000 ($250,000 filing  joint) a year.
4	Moving forward and implementing the health-care law.	42	53

When asked who would be blamed if a compromise is not reached, 19% said the president, 24% said Republicans, and 56% said both. When asked what their outlook is for reaching a compromise, 14% said very optimistic, 34% somewhat optimistic, 7% somewhat pessimistic, 21 % very  pessimistic, and 4% were not sure.  The poll found 76% of all adults, 89% of Democrats, 69% of Independents, and 61% of Republicans would accept a tax rate increases for those earning $200,000 ($250,000 filing  joint) or more than a year to avoid the fiscal cliff. [NEIL King, Jr, “Poll: Strike a Cliff Deal Now”, The Wall Street Journal, December 13, 2012].

The Republicans may not care if an agreement is not reached on spending cuts. On December 13,  Brad Beckman, an economic adviser to President George W. Bush, appeared on Fox Business Network The Willis Report and commented on this. Beckman said “since Obama won’t agree on spending cuts, the GOP doesn’t care if an agreement is reached since automatic spending cuts automatically set in if no agreement is reached.”

Karl Rove, an adviser to President George W. Bush, recently commented on the Republican strategy and the possible effects on the Democratic party. He said:

He [the president] is now less interested in raising revenues than in raising marginal tax rates on top earners. He apparently believes that Republicans, in a weakened state and defending an unpopular position, might buckle on a central GOP tenant, opposition to any increase in marginal rates. That might kick off a Republican civil war, resulting in divisive party primaries in 2014 that leave the president’s opposition even more weakened and produce more sub-par candidates like this year’s  Republican Senate candidates in Indiana and Missouri.  Still the strategy [dividing the Republicans] will probably fall short. Republicans will be the majority party in the House of Representatives for the next two years. The president’s actions now will make future cooperation difficult. The less Mr. Obama achieves in the next two years, the more his party suffers in 2014 and perhaps in 2016. To get things done, Mr. Obama needs both the House speaker and Senate minority leader to be strong partners who can deliver on a deal when it is negotiated, even if they are of the opposite party. If Mr. Obama is successful in weakening Speaker Mr. Boehner, then it will be more difficult to get legislation like comprehensive immigration reform brought to his desk. On the other hand, the president may prefer to have immigration as an issue, not an accomplishment.  All his bludgeoning of House Republicans to raise marginal [tax] rates may well appeal to his political instincts. But when the animating force for a president is humiliating the opposition rather than working with them, bad things usually come to pass.  [“What Obama Is Really Bargaining For”, The Wall Street Journal, December 13, 2012].

Mr. Boehner and the president held a meeting on December 13 but they could not agree on and are far apart on reaching a compromise.  Mr. Boehner said “Obama’s proposal can’t pass the House or Senate and the House will work through Christmas break to reach a deal” [Fox Business Network, The Willis Report, December 12, 2012]. On December 16, Mr. Boehner proposed a modified tax increase on the wealthy, reductions in entitlements, reforming Social Security by using a modified cost of living index for determining the annual increase in benefits and raising the eligibility age for Medicare, but did not specify what age. Sean Hannity, host of Fox News Hannity, said the president made a counter proposal offering $1.2 trillion higher tax revenue and $1.22 trillion reduction in spending, and raising taxes on persons earning more than $400,000 a year, up from his previous position of $200,000.  Harry Reid, Senate Majority Leader, said there is no way he will agree to changes in Social Security.

On December 20, the House passed a bill to reduce government spending and to reduce planned defense cuts, with 20 GOP members voting against it.  The bill now goes to the Senate, but it is doubtful that it will pass unless all GOP members and some Democrats vote yes.  Even if it does, by chance, pass the Senate, Obama said he will veto it and there are not enough votes to override his veto. A vote was not taken on Plan B to increase taxes on the upper one percent of taxpayers and replace the sequester with responsible spending cuts that will begin to address our nation’s crippling deb  because there were not enough votes to support it. Mr. Boehner challenged Mr. Reid and Mr. Obama to work on legislation to avoid the fiscal cliff and said the Senate must act now. Democrats opposed it because they said Plan B was designed to give the GOP leverage to demand more spending cuts designed to increase the nations debt ceiling coming in early 2013.

Regarding the president’s proposals on the fiscal cliff, Bill Bennett, a national syndicated radio talk show host, appeared on the Fox News program Hannity on December 20 . Mr. Bennett said:  In the end it will depend on what the American people say and have to decide if the consequences are what they want to live with. We aren’t going to prevail on what Barak Obama has wrought. They [voters] put him in and aren’t going to be punished. . . .  The American people have to see the consequences of decisions they made in November [re-electing Obama].  I think the president is wrecking the country.  The status-quo, the way we are going, we cannot survive.  The status-quo has to pay-we need the leverage.

On December 20, the Fox Business program The Willis Report centered on the topic “Dangling Over the Fiscal Cliff”.  Host Gerri Willis asked her guests Carlos Guiterr former Republican adviser, and John Fund, columnist for the National Review, why are Democrats focusing on tax increases? One-half of taxpayers don’t pay any taxes. Mr. Guiter replied “Boehner’s has a good fiscal plan. A family of four making $200,000 (defined by Obama as wealthy) doesn’t feel wealthy. Democrats plans are all about idiology and not working class taxpayers. Poverty is increasing, and the labor participation rate is down, We can’t go on like this and we are in trouble now-forget about the fiscal cliff.”  Mr. Fund replied:  The president wants us to go over the fiscal cliff and is willing to take a hit on the economy because he wants a tax system that is more equitable and more redistributionist. He wants all revenue from the middle class tax cuts to go up so he can play post Christmas Santa Claus and redistribute it.  The president is taking the risk of going over the fiscal cliff very lightly and is hurting our economy.  Investors are seeing this. The number of corporations listing on the New York Exchange is down with all the uncertainty and regulation, IPOs are down and small business start-ups are down. The president needs to level with the American people. Instead of talking to them about punishing the rich, he needs to explain why we have a terrible insurmountable entitlement problem. Right now its all about taxes.

If a compromise is not reached by the end of the year, many Republicans said they plan to introduce legislation to extend the Bush tax cuts for the middle class and allow tax increases on the wealthy to occur automatically.

Many Republicans are opposed to tax increases on the wealthy and are upset with Mr. Boehner’s proposal to allow some tax increases on the wealthy.  His re-election as House Speaker may be in jeopardy when the new congress convenes in January.

CIRCULAR 230 DISCLOSURE:  Pursuant to regulations governing practice before the IRS, any tax  advice contained herein is not intended or written to be used and cannot be used by the taxpayer  for the purpose of avoiding tax penalties that may be imposed on the taxpayer.