Daily Tax Update - July 18, 2011: No Debt Deal Yet

NO DEBT DEAL YET:  Although negotiators continued to meet over the weekend to try to resolve the debt limit/deficit reduction impasse, no clear path forward is evident.  Multiple plans are still in play, including the "fallback" or "Plan B" proposed by Senate Minority Leader Mitch McConnell and a House "cut, cap, and balance" proposal, but a deal remains elusive.

  • Yesterday, White House Budget Director Jacob Lew said, "I believe the debt will be extended.  Our efforts over the next days will be to ... do as much as we possibly can to make the tough decisions."  Lew criticized any talk about the possibility of a government default saying, "I think the risk of taking that path is just enormous - the president referred to it as an Armageddon - it would mean higher interest rates, which are a tax on all Americans, it would undermine our standing in the world and it could have a cloud for a long time over the United States."
  • Sen. Jon Kyl (R-AZ) said yesterday, "I'm a little frustrated that (administration officials are) never willing to be specific about the reductions in spending that they would be willing to do. . . . The president always just holds out this idea that, well, if you'll raise taxes, and he is very specific about the taxes he wants to raise, then (he) might be willing to look at cuts elsewhere."  Kyl added, "Well, of course, that's just not good enough.  So, the point I'm trying to make is when the president says he's willing to compromise, understand why Republican leaders have been pretty reluctant to go along with this deal because we frankly don't know where the spending reductions come, but we do know where the taxes are."
  • An expected House floor vote this week on the GOP’s "cut, cap and balance" proposal was postponed until next week. The proposal would cut spending immediately and cap future spending as a percentage of GDP, while requiring Congress to pass a balanced-budget amendment as a condition to raising the debt ceiling by $2.4 trillion.  The Senate is unlikely to pass the House’s proposal but instead will consider a modified fallback plan from Senate Minority Leader Mitch McConnell.  Under that plan, the President would be allowed to win an incremental and immediate debt-ceiling increase, which would require a two-thirds majority vote in Congress to stop him.  The fallback plan would also likely contain moderate spending cuts and the creation of a new commission to target future deficit reduction.
  • Today, the White House issued a veto statement on the House "cut, cap and balance" plan.  The statement said, "Neither setting arbitrary spending levels nor amending the Constitution is necessary to restore fiscal responsibility.  Increasing the federal debt limit, which is needed to avoid a federal government default on its obligations and a severe blow to the economy, should not be conditioned on taking these actions.  Instead of pursuing an empty political statement and unrealistic policy goals, it is necessary to move beyond politics as usual and find bipartisan common ground."
  • Senate Majority Leader Harry Reid said today that the Senate would remain in session until a debt ceiling bill is passed.  Reid said, "The Senate has no more important task than making sure the United States does not fail to pay our bills for pre-existing obligations like Social Security for the first time in our history.  To ensure that we meet this responsibility, the Senate will stay in session every day, including Saturdays and Sundays, from now until Congress passes legislation that prevents the United States from defaulting on our obligations."

MISCELLANEOUS GUIDANCE RELEASED TODAY:

  • Notice Notice 2011-61 invites comments regarding education providers under the tax return provider program.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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