What Do Obama, the “Gang of Six” and Paul Ryan Have in Common?

What do Obama, the “Gang of Six” and House radical Teapublican, Paul Ryan, all have in common? They've all proposed a $4 trillion deficit reduction package. Does anyone think that is pure coincidence?

Obama's tactical move today, July 19, along with the Senate Gang of Six, is to hitch his (and the Gang's) proposed $4 trillion proposed cuts to the current negotiations simultaneously going on between Reid and McConnell in the Senate to immediately cut spending by $1 trillion to $2 trillion in exchange for raising the debt ceiling.

Obama's move shows clearly he does not want to take on deficit cutting piecemeal. He wants to get it all over at once and behind him before campaigning for 2012 begins in earnest. And he's willing to offer big cuts in spending to get it done now, before the 2012 election cycle gets seriously underway after this summer.

The likely outcome of this “rush to get it done” will be that the immediate, short-term $1 trillion to $2 trillion in spending cuts being worked out by Reid-McConnell will still pass, while the longer term $4 trillion now resurrected “grand deal” by Obama-Gang of Six will quickly follow. It may even be appended to the short-term package.

While the short-term package will be all spending cuts, the now revived $4 trillion “grand deal” package will contain some tax revenue raising. However, as previously noted, the tax revenues will be primarily tax loophole closings that are often difficult to collect and verify, while the tax code revision will include major reductions in the top personal and top corporate tax rates, both currently at 35 percent.

What might the likely “relative proportion” between spending cuts vs. tax loophole hikes look like in the final package? If Obama's previous “grand deal” is any indication, it could look similar to that prior deal's 87 percent spending cuts to 13 percent tax hikes. Certainly no less than a 75 percent to 25 percent mix.

It is no accident that the Gang of Six package is not available to the public yet. It is being kept under close wraps in the Senate. But, already, it has leaked out that the Gang's proposal includes a reduction in the top personal income tax rate from 35 percent to 29 percent. (The House Republicans have been calling for a 25 percent rate from the beginning. So, that's more than half way there before bargaining even begins.)

Of course, even at the current 35 percent top personal tax rate, that's not what the wealthiest 1 percent of taxpayers actual pay in federal taxes. In 2007, their “effective” income tax rate – i.e. what they really paid – was only 16.6 percent. This compares to a top rate of 24.2 percent for the same wealthiest 1 percent in 2000. Reducing the current 35 percent to 29 percent, as proposed by the Gang of Six, will likely, therefore, reduce that “effective” top rate even further, to the 12 percent to 14 percent range.

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It's not yet reported what the Gang's proposal is for the corporate tax. But it is highly likely it proposes to reduce the top corporate tax rate by at least as much as the top personal income tax rate – i.e. from the current corporate top rate of 35 percent to a 29 percent rate; perhaps even lower in stages over several years. Business interests have been consistently calling for a 20 percent top corporate rate for the past year. If the top corporate rate is reduced to 29 percent, the net gain in after tax income realized by corporations will exceed the loophole closing measures. And if it's reduced to less than 29 percent, to a low of 20 percent, it will far exceed the loophole closings.

The Obama-Gang of Six package also closely resembles the original proposals of the Simpson-Bowles Commission made public last November. Obama has always been comfortable with much of their recommendations. The Gang of Six's original proposals were worked out last December, in an attempt to legislatively operationalize the Bowles-Simpson recommendations in the Senate. But the Gang did not press forward with their proposals while the House radicals were preoccupied with cutting the 2011 budget last spring by $38 billion.

It is likely the intent was to wait until after the debt ceiling was raised to reintroduce the Gang's proposals. But events became telescoped with the House radicals' intent on provoking a near default by playing chicken with the debt ceiling, and both Biden and Obama failing to get a deal with Boehner-McConnell last week.

So, now we see the real plan once again emerging. All the House radical, Tea Party huff and puff has been mostly theater, from the beginning up to the latest version of “cut, cap and balance” nonsense. That's been just playing to the audience at home. But all the radical theater did conveniently provide excellent “crazy right-wing” cover to Simpson-Bowles-Obama-Gang of Six proposals now, once again, coming to the fore. It has made the draconian cuts that are about to drive through Congress appear rational and reasonable.

In the end, however, the $4 trillion mostly spending cuts will devastate the economy. And when combined with the other three still unresolved mini-crises preventing sustained recovery of the US economy – i.e. jobs, housing-foreclosures-fiscal crisis of local government – will all but ensure a double-dip recession on the horizon.