Latest "Grand Bargain" Compromise Shifts 'Rich' Threshold

Tyler Durden's picture

The rumor mill on unnamed sources and strawmen is full tonight with Reuters, Bloomberg, and WaPo all reporting on a new new deal from Obama that 'meets the Republicans more than halfway' apparently. The crux appears to be a $1.2tn tax increase (over 10 years of course) thanks to higher rates on households earning over $400k (up from his original $250k but below Boehner's $1mm) and $930bn in spending reductions, including the much-discussed 'accounting' gimmick of cost-of-living-adjustments (and unChained CPI - see below) in Social Security. The offer also has a 'debt ceiling' proviso to increase the borrowing capability for two years via McConnell's proposal. S&P futures got a lift from this great 'austerity' news (that will perplex the Keynesians) but seemingly got most of the excitement out of the way this afternoon.

Boehner appears to have seen through the guise of accounting jiggery-pokery and debt-ceiling removery and responded:


More from Bloomberg:

Boehner spokesman Brendan Buck, in an e-mailed statement tonight, called the offer “a step in the right direction” though he said it “cannot be considered balanced.” He said the offer included $1.3 trillion in revenue and $930 billion in spending cuts.


That calculation doesn’t count $290 billion in lower interest payments as part of the spending cut. Interest savings are a byproduct of tax and spending decisions. Buck said the speaker hopes to continue negotiations.


Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations at their weekly conference meeting tomorrow, according to a leadership aide who requested anonymity to talk about the leaders’ plans.


Obama’s offer would set the top tax rates on dividends and capital gains at 20 percent, the person said. Combined with tax increases from the 2010 health care law scheduled to take effect in January, the top rates would be 23.8 percent.


Obama would return the estate tax to 2009 parameters, with a $3.5 million per-person exemption and a 45 percent top rate.


The dividend proposal matches the bill Senate Democrats passed in May and would raise less money than Obama’s budget, which called for taxing dividends as ordinary income. The estate proposal is less generous than the parameters backed by many Senate Democrats, who would extend the $5.12 million exemption and 35 percent top rate


* * *


About $130 billion of the spending savings would come from switching the way that annual inflation increases for Social Security benefits are calculated. Obama’s offer would include protections for the most vulnerable recipients, the person said.

Some more on Chained CPI (via Washington Post):

When President Obama tried to reach a comprehensive bargain with Republicans to pay down the federal deficit last year, he floated the idea of changing the cost-of-living adjustment for Social Security benefits from the traditional consumer price index to something called a chained Consumer Price Index, or “chained CPI.”


Economics and policymakers generally make the assumption that when prices rise, people will turn to a less expensive product. They’ll buy chicken instead of more expensive beef, iceberg lettuce instead of arugula, store-brand, instead of name-brand cereal. The chained CPI attempts to account for how people react to inflated prices.


It’s an arcane detail in the ongoing budget debate, but the chained CPI is appealing to budget experts and some Republicans and Democrats, because it only slightly tweaks the inflation formula, while building significant savings over time, perhaps more than $100 billion over a decade.


Making such a change also means paying out less in Social Security benefits over time — something liberal Democrats can’t stomach. Imagine, for example, a person born in 1935 who retired to full benefits at age 65 in 2000. People in that position had an average initial monthly benefit of $1,435, or $17,220 a year, according to the Social Security Administration. Under the cost-of-living-adjustment formula and 2012 inflation, that benefit would be up to $1,986 a month in 2013, or $23,832 a year. But if payouts were adjusted using chained CPI, the sum would be around $1,880 a month, or $22,560 a year — a cut of more than 5 percent and more as the years go by.


As for taxes, the nonpartisan Tax Policy Center has calculated that most Americans would pay a little more than $100 more per year. Families making between $30,000 and $40,000 a year would see the biggest increases — almost six times that faced by millionaires — but that’s because upper-income Americans are already in the top bracket and not being pushed into higher marginal rates because of changing bracket thresholds.


All told, chained CPI would lead to a larger across-the-board cut in Social Security benefits and a 0.19 percent income surtax, according to experts. Those changes could make the proposal politically unpalatable for some, which is why some budget watchdog groups have argued that the only fair way to implement such a change would be to couple it with an increase in Social Security benefits and to exempt Supplemental Security Income, which provides support for impoverished elderly, disabled and blind people.


Will lawmakers unveil some kind of proposal using chained CPI and other adjustments in federal benefits emerge in the coming days to help strike a deal? Stay tuned.

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jeff314's picture

probably liesman...

knukles's picture

I'm so thrilled, I'm going to wee my pants.

(now just be aware, very aware of how they define $400,000 as adjusted gross, modified adjusted, gross, less what deductions and credit, etc.... excluding what types of "ordinary income" a la the hedgie and pvt eqty cap gains, etc...)

And in any case won't be big enough to even matter... last as rounding in the broad scheme of things.... propaganda...

ACP's picture

I heard recently that movies used to have an excise tax. If the Hollywood crowd wants taxes so bad, how about a 50% excise tax on movies that make over $250k?

Edit: Everyone in the industry knows that Hollywood inflates budgets very consistently by a factor of 4 ($100 mil movie actually costs around $25 mil) in order to evade taxes.

Zer0head's picture

listen Boner, just play along and I'll see that you have a nice landing pad when they turf you as speaker, don't believe me look what I did for that fat ass Christie.

ACP's picture

I, Boner, would never, ever raise taxes on my base, er, the Hollywood crowd. My utter incompetence in personal investing, despite having access to large amounts of insider information, forces me to have a massive hard-on for Obongwater.

Tijuana Donkey Show's picture

See, I must be a simpleton. I read this, and all I saw was old people eating chinese made cat-food from MallWort. Something about the CPI, or the Catfood Price Index, which lets our precious seniors know how much ash they are getting with their "fish" for dinnertime. Maybe a little Fancy Feast for Christmas, why not spurge and enjoy your golden years? All the seniors I know ate the cat a long time ago, and just use the cat story as a cover for buying all the catfood. They LOVE to take in the occasional stray as well, a little real meat helps round out the house, for those days when Fancy Feast is a distant memory, and nothing makes it's own gravy for dinner. Who says America and China don't have anything in common, think how far a bit of cat and cat food can bring two groups of serfs together in such a touching way. When this crowd says "keep it physical" their investments are still meowing bitchez! You can't eat gold, but you can pet and eat a cat........ 

strannick's picture

Im gonna paste that into my SHTF Folder. Thanks

BooMushroom's picture

In our next episode of "Senior Survivalist," watch Arlene get denied for a variance to raise backyard chickens! Then, she and a neighbor realize there's no ordinance on cats, and the nearby abandoned properties are full of mice and rats anyway!

Watch as they learn to farm cats for meat, milk, and fur! Look at the beautiful coats they make and sell, and finally make enough money to turn their air conditioner on for the month of July!

That's next, on "Senior Survivalist!"

duo's picture

$400,000 buys what $250,000 did in 2008, except for real estate.

TraderTimm's picture

None of this matters, honestly. Another day in the drama-stage known as US Politics.

I'm so fucking sick of this bullshit. They have no vested interest in fixing anything. They have no skin in the game. Forget re-election, they are set with their salaries and benefits and massive contrubutions from admirers far and wide.

Why would we trust these people to make any decision that has ZERO impact on the ones making the decision?

It is fucking lunacy, plain and simple.


Nobody For President's picture

Now, tell us how you really feel, TT.


smlbizman's picture

and everyone gets a big raise next wont see extra income, just extra taxes when your provided health care benefit will be considered income to an approx. guess is get a 15 thousand dollar raise and you get a 15 thousand dollar raise and you get a....

MiguelitoRaton's picture

If it passes, it will make the top...a generational Dolly Parton.

Stock Tips Investment's picture

The main problem is government spending. And on this, there is still a lot of commitment to reduce them. We need less government spending for greater personal spending. We have forgotten what made this country great?.

ball-and-chain's picture

C'mon.  Let's stop talking bullshit.

The rich act like their being raked over the coals.

All we're talking about it Clinton era tax rates.

Nobody's getting burned at the stake.


MiguelitoRaton's picture

Clinton Era Spending as % of GDP as well? Do we also get a Dotcom bubble to help generate false revenues?

GeorgeHayduke's picture

No. This time around they get a Fed printing press. This new method limits participation much more than some stock bubble where anyone might get to join the club.

FL_Conservative's picture

Exactly!  Everyone's using their allotment of oxygen on what the tax rates are when that doesn't even fucking matter.  What matters is SPENDING, not revenue.  When are we going to cut SPENDING?????????????????????????????????????????????????????????????????????????


Probably not until the market forces us to, would be my guess.

Beam Me Up Scotty's picture

The answer is never.  And if and when the market tries to force a spending reduction, they will spend more money and spend it faster.  IMO, the hyperinflation comes soon after the hyperdeflation.

BooMushroom's picture

Spending in nominal dollars will never decrease.

In real dollars, however, they must. Politicians will manipulate the numbers, but real spending must fall.

knukles's picture

All I know are a lot of "unrich" folks who're piss worried WTF is gonna happen to them with everything going on.... Cliff or No Cliff....
Way too much "noise" out there....
And yes, the so called sheeple know full well there's something wrong.  Radically wrong and they're getting shafted big time.  They might not be able to elucidate it or have similar perspectives... but there's big shit wrong, amigos, is the feeling I get.
Stoicism... Lot of that around and undercurrents of frustration and anger.
People are hunkering down... except government workers who don't see a cloud on the horizon...

Everybodys All American's picture

Give me a Clinton era size government and we got a deal.

knukles's picture

"Oh, I remember when I was a lad back in the good olde days...."

Clinton good old days

Oh, how times have gone to shit, eh?

HurricaneSeason's picture

It was his BJs and cigars. There is an aura that the commander in chief needs to maintain, like Kennedy.

HurricaneSeason's picture

If we get Marion Barry in there as president, watch which countries get scared shitless.

eatthebanksters's picture

Daz right! No crack pipe or stanky skank and da Mayor gets pissed!

icanhasbailout's picture

in my carefree and innocent days I was protesting things like Clinton lying in court and suffering no real consequences

Newager23's picture

This is a deficit / debt reduction plan? I don't think so. The deficit in 2013 will still be huge, likely around $1 trillion. All they are doing is kicking the can.

This plan in conjunction with the recently announced QE4 (where they raised their monthly purchases of Treasuries and mortgage backed securities to $85 billion per month), is not a solution. QE4 has the effect of misallocating risk (where people buy overvalued real estate) and misdirecting the use of capital towards U.S Treasuries. Moreover, it undermines the ability of markets to value assets appropriately (especially corporate stocks). To use an analogy: it creates a big mess that eventually has to be cleaned up. The Fed is throwing a big party of bailing out both the U.S. Government and the financial system, and the hangover is coming.

The printing press is now officially going full blast, and fiscal policy (by way of this new deal) is not helping. It is just a matter of time before investors tire of buying U.S. Treasuries and holding U.S. dollars. After all, you can’t borrow .45 cents of every dollar you spend. That simply cannot be sustained. If this economic methodology worked, there would be no need for taxes and deficits would not matter. You could just print what you needed. Clearly such a system is not possible, and the road we are going down has a cliff at the end.

Why are we using such insane economic policies? Because it is human nature to avoid pain, even if that means there is a possibility of intense pain. We would rather feel good for as long as possible. So if we can kick the can down the road to avoid pain that is what we will do. In the meantime, the Fed and the ECB will pretend that these policies are the best choice available. From their perspective, the alternative is simply not a viable choice: allowing the markets to rebalance on their own.

The markets have become completely manipulated because of the road we have chosen via quantitative easing. Now that we have started down this road the fear of getting off the road is no longer an option. We have literally past the point of no return. Now we have to literally pray that it works. Or, that is a better outcome that if we would have allow the markets to rebalance on their own.

The fear back in 2008 and 2009 was that we could not allow the financial system to collapse, because the outcome could be so chaotic that we might not be able to bring it back to life. In actuality, the fear was more greed oriented. Those with all of the money did not want lose it. They lobbied the U.S. government and the Fed to make sure that the system did not collapse. Thus, we started down the road of bailouts and quantitative easing. This is the road that we can no longer get off. And thus we have reached QE4.  

What does this mean for gold? It means we can expect much higher prices. Everyone should be dollar cost averaging and buying as much physical gold and silver, or mining stocks as they can. You should be building a portfolio of mining stocks to protect yourself against a major dollar devaluation. Or, perhaps be preparing for the possible investment of a lifetime. Who knows how high gold and silver prices will go. My estimation is that the range will be something between $3000 and $10,000 for gold and $150 and $500 for silver. Those are huge numbers that are going to drive stock prices much higher.

Between QE4 and central bank buying of gold, I think the floor for gold and silver prices continue to rise. Today I would place the floor for gold at $1400 and silver at $22. This lowers the risk of mining stocks. Of course, the financial system is needed to finance the building of mines. Thus, the risk for stocks without cash flow is increasing. However, this is not necessarily bad for mining stocks, because those mining companies with cash flow will be able to purchase gold in the ground cheap and grow at a fast rate. Thus, I expect the mid tiers to be the big winners and explode in value and growth. The majors also have a good chance to do well as the price of gold and silver heads higher. They will be very profitable, and dividend payouts could be substantial. (for mining stocks)



dikfr's picture

jesus - start a blog... oh wait sorry.

Beam Me Up Scotty's picture

Gold at 1400 and silver at 22.  That only happens if the market tanks big time.  I'd love to be able to buy silver at 22 an ounce again!!  Same with gold at 1400.  Back up the truck.

fonzannoon's picture

This deal sounds plausable. It punts the debt ceiling two years and each side claims victory. Nothing is solved but we avoid a debt downgrade.

michiganmaven's picture

what in that plan makes you think we avoid a downgrade? Cause we came to an agreement? This "agreement" is still a joke...

fonzannoon's picture

Because the US has all the ratings agencies in a giant headlock. Otherwise we would be rated a lot lower already.

Beam Me Up Scotty's picture

Thats about all they can do, kick the can.  Meanwhile, 20 trillion in debt will approach very quickly.

vote_libertarian_party's picture

'avoid a debt downgrade'?  Only because the Big 3 rating agencies won't do their jobs.  This plan would reduce the deficits by 5-10% at best.

fonzannoon's picture

did you think I meant we would avoid a downgrade for any other reason?

knukles's picture

"When you've got 'em by the balls their ratings inevitably follow."

fonzannoon's picture

That is my 2013 white swan. US gets upgraded.

Everybodys All American's picture

Nothing leads me to believe that a debt downgrade will not happen, but we shall see. This is a spending problem that in reality neither side is addressing and is especially being put off by the president. All these numbers are based on a ten year budget plan that no one could guarantee beng enacted over the next ten years. Ten year plan. Since when have we been able to plan ten years out. This is simply to make the numbers seem larger. It's a joke.

If any of the spending cuts are real I'll be surprised. Remember the tax revenues they are talking about can run the government for less than ten days.

fonzannoon's picture

You are saying all that as if the ratings agencies are actually an independant organization capable of unobstructed thought.

fonzannoon's picture

Like it matters if the US gets pushed to AA+ by all three agencies?

Everybodys All American's picture

Sooner or later the credit rating downgrades will cause a collapse in confidence in the dollar. Once that happens the reserve currency is lost forever. That will matter in all international trade. This is no small outcome but you must recognize that it's incremental and it's inevitable with Bernanke running the Fed.

In the near term, many bond and mutual funds trade with a prospectus that mandates that they only deal with AAA securities where at least two or three agencies maintain the AAA rating of a country. This can force selling pressure in the markets. Again it's going to be incremental.

fonzannoon's picture

Those prospectuses will be altered to read "AAA securities and US debt". They will just keep moving the goalposts. The dollar may fail, but it sure as hell won't be because the ratings agencies caused it.

Everybodys All American's picture

Ratings agencies simply evaluate the ability of governments in this case to pay back the debt. They are not the cause of anything. Just because they messed up the ratings on MBS in 2007 and prior doesn't mean they are totally useless.

fonzannoon's picture

"Ratings agecies simply evaluate the ability of governments in this case to pay back the debt"

If that were the case would the US still be investment grade across th board? If the answer is "yes because they can print money" then S&P should upgrade is back to AAA.