Wall Street is skittish and may force a fiscal cliff compromise. Chris Krueger of the Washington Research Group points to the Keep It Simple Stupid option:
This is the simplest solution, though Boehner will need A LOT of Democrats to pass it could well result in him losing the Speaker’s gavel. This was the original Plan B that many Senate Republicans have endorsed, which involves passing the Senate-passed S.3412 “Middle Class Tax Cut Act.” The bill has three big components:
1. One-Year Extension of All Rates for 98%. ONE-YEAR extension of the current Bush Tax Cuts for those individuals making under $200K and couples below $250K (the 98%), including marginal rates, capital gains, and dividends.
2. 2012 AMT Patch
3. Dividend Tweak for the Top Rates. For those with income above the thresholds, the rate for both capital gains and dividends is 20% (doesn’t include the 3.8% Investment Income tax) unlike the shift to ordinary income for dividends in a full cliff dive. Under this scenario, the top tax rates on capital gains and dividends would rise from 15% to 23.8% — much lower than the potential 43.3% dividend tax rate in a cliff dive.
The Senate bill also includes some limits on personal exemptions and itemized deductions for upper-income taxpayers — the re-instatement of so-called PEP and Pease limitations. These can cause personal exemptions to be completely phased out for taxpayers in the top bracket and wipe out up to 80% of certain itemized deductions for very wealthy taxpayers. But they are not as sweeping as other proposals to raise large amounts of revenue by cutting loopholes and deductions.