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Fiscal Cliff Deal: Plan B or Plan CYA?

Markets were higher in Europe and the United States yesterday (Tuesday) as progress was made on a fiscal cliff deal as well as on resolving debt ceiling issues before year end.

But then Republican House Speaker John Boehner rattled everyone's cages by proposing his "Plan B," which would make permanent the Bush tax cuts for all taxpayers with annual incomes under $1 million.

"Right now we need to do something to get the president's attention," Rep. Frank Lucas, R-OK, said in an interview with Bloomberg News. Boehner's approach "might just help," he said.

Fiscal Cliff Deal: What is Plan B?

The Washington Post reported that Plan B legislation was still being drafted late Tuesday but, in addition to making the Bush tax rates permanent for incomes under $1 million, Plan B would create a permanent alternative minimum tax patch and maintain the 35% inheritance tax on estates of more than $5 million.

Plan B does not address the automatic, across the board spending cuts that will go into effect if a fiscal cliff deal fails, nor does it address the looming debt ceiling.

"I believe it's important that we protect as many American taxpayers as we can," Boehner said Tuesday. "And our Plan B would protect American taxpayers who make a million dollars or less and have all of their current rates extended."

Plan B is intended to avoid tax hikes on the vast majority of Americans and to buy time to address spending cuts and other issues in January, following the holiday recess.

Boehner plans a House vote on his Plan B on Thursday.

Fiscal Cliff Deal: Smart Strategy or Sneaky Tactics?

Even as he was announcing Plan B, Boehner was careful to emphasize that he is continuing his negotiations with U.S. President Barack Obama regarding a fiscal cliff deal.

But reaction from Democratic Senate Majority Leader Harry Reid was swift and negative.

"Speaker Boehner's proposal is not balanced, will not protect the middle class, because it can't pass the Senate. And it doesn't do anything. His so-called Plan B is allowing people who make up to a million dollars to not pay more," Reid said. "If Republicans choose to walk away again, the Senate bill is the only plan that will protect middle-class families from the tax hike on Jan. 1," Reid said, referring to his own backup plan.

By bringing his plan to a vote, Boehner would put Republicans on record as supporting lower taxes for incomes of less than $1 million. Knowing that Plan B will never pass in the Senate in its current form, a Senate rejection of Boehner's proposal might effectively shift blame for fiscal cliff tax hikes to the Democrats.

In this way, Boehner may be able to wring more concessions out of President Obama, who has already made significant concessions in seeking a comprehensive fiscal cliff deal.

Democrats are not happy with what they've already given up. They fear that Republicans will simply take those concessions and then threaten to blow up the negotiations unless they get more.

Meanwhile, Boehner is feeling pressure from Republicans who think they can squeeze more out of the Democrats by being obstinate. And President Obama is under pressure from Democrats who feel that he has already given away too much and won't support new concessions to get a deal.

Bottom line: Compromise leading to a comprehensive deal on the fiscal cliff and the debt ceiling has gotten a lot more difficult since Plan B.

Once the markets understand the fiscal cliff deal implications, yesterday's rally could be reversed.

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