Secretary of the the Treasury Timothy Geithner said on Wednesday the U.S. government will hit its legal borrowing limit of $16.4 trillion on Monday, triggering “extraordinary” measures to be taken by the Treasury department to keep the government afloat and operational for two more months before it defaults on its debt.
Geithner sent a letter to Congress that stated the Treasury department would begin taking “extraordinary measures” to allow the government to save $200 billion in “headroom” beginning on Jan. 1st.
However, the size and scope of the new measures are still relatively unknown since the government’s fiscal policies for 2013 are still being worked out by U.S. lawmakers on Capitol Hill.
In 2011, Congress reluctantly agreed to raise the debt ceiling limit to $16.4 trillion from $14.3 trillion amid a lot of political wrangling between the White House, House Republicans, and Senate Democrats that culminated in a credit downgrade by Standard & Poor’s.
On Wednesday, House Speaker John Boehner (R-Ohio) issued a statement that states the Senate “must act first” to avoid facing over $600 billion in tax increases and spending cuts that will go into effect on Jan. 1st.
Speaker Boehner indicated that the House would consider any legislation passed by the Senate.
The Senate returns from Christmas break on Thursday along with President Obama who cut his Hawaiian vacation short to deal with the fiscal policy struggle on Capitol Hill that still weighs heavily on the business community and ordinary Americans who are unsure about how future tax increases will hit their wallets in 2013.
Latest holiday spending numbers released yesterday from MasterCard Advisors Spending Pulse shows that holiday sales only rose 0.7 percent from October 28 through December 24, down from a 2 percent increase in 2011.
The looming “fiscal cliff” amounts to $536 billion in tax increases and is set to begin on January 1st impacting all income groups in America. The military and other federal government agencies would also be forced to cut $110 billion in spending.
President Obama campaigned on the platform that he would hold the tax rate steady at 35 percent for the middle class while allowing the income tax rate to move higher to the Clinton era tax rate of 39.6 percent for wealthier Americans individuals making above $200,000 annually and $250,000 per family.
However, President Obama’s latest compromise deal has a new offer in which he has increased the income tax rate threshold to over $400,000 annually for Americans. Obama would freeze income tax rates for Americans earning $400,000 or less while increasing them for people making more.
House Speaker John Boehner (R-Ohio) proposed a failed budget plan last week known as “Plan B” that didn’t receive enough votes among House Republicans in a closed door meeting to move it to the House floor but it was intended to allow income tax rates to rise for Americans earning more than $1 million per year while holding the income tax rate steady for all other Americans earning under $1 million.
President Obama initially proposed a budget that included $1.6 trillion in revenues over 10 years but he has since made some compromises and lowered that amount to $ 1.22 trillion including interest with $400 billion in health related cuts, up from the initial $ 350,000 billion in earlier proposed cuts.
The rest of the revenues would largely come through the wealthiest American paying a higher income tax rate.
President Obama and Speaker Boehner have both proposed raising taxes on dividends and capital gains from 15 percent to 20 percent.
Under Boehner’s “Plan B” he proposed raising revenues to $1 trillion, up from the initial $ 800 billion Republican plan which consisted of a plan that eliminates deductions, re-writes the tax code in 2013, and slows inflation adjustments made to tax brackets.
President Obama has given up on his proposal to extend a temporary cut in payroll taxes paid by over 100 million American workers while Republicans want that payroll tax to return back to 6.2 percent from the current 4.2 percent.
The elimination of the payroll tax cut will reduce on average $920 for the average American family, according to the non-partisan Tax Policy Center.
President Obama is in support of a deal that would raise the amount the government is permitted to borrow over the next two years, allowing him to avoid another debt ceiling debacle with the Republican majority Congress until after the 2014 mid-term elections.
Earlier, President Obama requested to have permanent authority to increase the debt ceiling without receiving congressional approval.
However, Republicans are seeking to have Congress to be included in the process.
Last year, House Republicans made demands that included requiring budget cuts before finally agreeing to raise the debt ceiling limit.