Tax Rates, Health Care Spending Key to US Fiscal Standoff

Higher tax rates for the wealthiest Americans and reform of health care spending for the elderly and impoverished have emerged as the key issues in the contentious Washington stalemate over U.S. government financial policies.

U.S. President Barack Obama, the Democrat newly re-elected to another four-year term, says he will not agree to resolve what Washington is calling a "fiscal cliff" at the end of the year, without ending a tax break for households making more than $250,000 a year. Without a compromise, $600 billion in mandated government spending cuts and tax increases for most American workers will take effect January 1.

"We're going to have to see the rates on the top two percent go up," the president said. "And we're not going to be able to get a deal without it."

But Obama's political opponents in Congress want sharp cuts in spending for the country's long-standing health care programs for the elderly and the impoverished and government pensions for retired workers.

The Republican leader in the House of Representatives, Speaker John Boehner, has been adamant in opposing any increase in tax rates, while agreeing to an increase in government revenue.

"We're willing to put revenues on the table, but revenues that come from closing loopholes, getting rid of special interest deductions and not raising rates," he said.

One financial analyst, Mark Vitner, the senior economist at Wells Fargo Bank, said that so far the president and Republican leaders have engaged in "a lot of political posturing" even as the deadline for a compromise approaches. But Vitner says Obama is in a stronger position.

"I think that the political reality is that the president has a stronger negotiating position right now," he said. "He was just re-elected."

But he said that raising taxes will not resolve the country's chronic deficit spending.

"It’s one of the more frustrating aspects of this whole discussion. We’re running a budget deficit in excess of a trillion dollars, which means we’re spending a trillion dollars more than we’re taking in," Vitner said. "We can’t fix that by raising taxes."

In the end, the bank executive sees a partial resolution of the financial standoff, what he calls a "slide" over the fiscal cliff, not a "plummet."

"We’re going to have to address spending," Vitner said. "I just don’t think it can be done in the time frame that we're under right now. So I think what will result in all of this is that we’ll see higher tax rates. We’ll see a commitment to cutting discretionary spending, which is a small part of the budget, and a commitment to reforming both taxes and the budget process so that we can make some longer-term entitlement cuts, maybe means testing Medicare or extending the age limit for qualifying for Medicare and Social Security. Those things will help a lot over the long run, but they won’t help all that much in the short run."