In the battles over the budget, there are really just two issues: How much revenue the government takes in and how much it spends. 

President Barack Obama signed a big tax increase into law on Jan. 2, and since then Republicans have tried to keep the fight squarely focused on the spending-side of the ledger. But that hasn't stopped Democrats and others from seeking different, and at times innovative, ideas for bringing in more cash to federal coffers.

Some of them are new, such as limiting the amount of money that could be shielded from taxes in retirement accounts. But not all of the proposals are targeted at higher earners.

Although it may be months before a tax reform effort promised by the chairmen of the House and Senate tax-writing committees moves into higher gear, an increasing number of items are now on the tax menu.

Some of these proposals could be ingredients in a compromise deal on taxes and entitlements between Obama and GOP congressional leaders.

In Obama’s budget proposal for Fiscal Year 2014, which will be formally released Wednesday, administration officials say the president will offer a few new contributions to the revenue debate:

• A change in the inflation indexing formula used to set the levels for the tax brackets, the standard deduction and other provisions in tax law. Obama will propose using a less generous indexing measure called “chained CPI.” According to an analysis by the Congressional Budget Office, using chained CPI for the tax code would raise nearly $124 billion in new revenue over 10 years.
• An increase in taxes on cigarettes and other tobacco products in order to help pay for an initiative to provide preschool education to four-year-old children.
• A limit on the amount of money that could be shielded from taxation in retirement accounts. The Obama proposal would prohibit individuals from accumulating more than $3 million in IRAs and other tax-sheltered retirement accounts. This proposal would raise $9 billion over 10 years, according to administration officials.

Obama will likely reiterate his support for an idea he has proposed since 2009 and which Senate Democrats endorsed in their budget resolution: limiting deductions and other tax preferences for upper-income people.

Meanwhile, there’s some bipartisan support for a tax or fee on carbon dioxide emissions. Former Secretary of State George Shultz --who served under President Ronald Reagan -- and conservative University of Chicago Nobel laureate economist Gary Becker co-authored an op-ed in Monday’s Wall Street Journal endorsing the idea of a revenue-neutral tax on carbon.

This would encourage producers and consumers to shift away from more carbon-intensive energy sources such as coal and toward less carbon-intensive sources. They’d also eliminate tax breaks for various energy sources, such as biodiesel. The revenue from the carbon tax could be refunded to taxpayers, perhaps in the form of a “carbon dividend,” Shultz and Becker argue.

Although their version is revenue-neutral, the carbon tax idea could end up being part of a larger package of revenue raisers.

Susan Walsh / Susan Walsh / AP

President Barack Obama gestures as he speaks during an Easter Prayer Breakfast in the East Room of the White House in Washington, Friday, April 5, 2013.

The carbon tax concept won the support of 41 senators, all of them Democrats, during a vote three weeks ago, when it was proposed by Sen. Sheldon Whitehouse, D-R.I., as an amendment to the Fiscal Year 2012 budget resolution.

Whitehouse said Tuesday that the lesson of that vote was “we’ve got a more solid base of support than I thought and obviously we need lots of room to grow in order to move it along.”

Whitehouse said a carbon tax could be part of the tax reform effort that Senate Finance Committee chairman Sen. Max Baucus, D-Mont., and House Ways & Means Committee chairman Rep. Dave Camp, R-Mich., will lead this year.

The Rhode Island Democrat argued that a carbon tax could be made appealing to Republicans since the revenue that would be generated could be used to pay for tax cuts: “They’d probably want to do things like get rid of the estate tax, lower the corporate tax rate – I’m not sure we’d be thrilled with all of those – but it’s a discussion worth having,” he said.

Senate Finance Committee ranking Republican Orrin Hatch of Utah said he had noticed Shultz’s support for a carbon tax, adding, “I’ve basically been against a carbon tax, but I’ll look at it and see.”

Another Senate Finance Committee member, Ben Cardin, D-Md. said Tuesday the carbon tax is an idea “absolutely we need to take a look at ... we need to look at different revenues to take care of our energy and transportation needs.”

As for using chained CPI to index parts of the tax code, Cardin said he was “very much aware” of the increased revenue that would result from that change. “More revenue is a good idea, but chained CPI also affects the beneficiaries not only of Social Security but other programs. My preference is to do entitlement reform without affecting middle-income and lower-income beneficiaries.”

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With budgets on the table, Washington divide remains as wide as ever

Florida Sen. Marco Rubio sought to put a softer face on Republicans’ small-government agenda, accusing President Barack Obama of spreading blame for his own administration’s shortcomings.

Rubio used the official Republican response to Obama’s State of the Union address Tuesday to advance the friendlier tone the GOP has sought to project after two straight drubbings in presidential elections.

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A 41-year-old Cuban-American, Rubio referenced his own experience on matters such as immigration and entitlements. But he also used the spotlight to showcase well-known Republican positions: for a balanced budget amendment, for instance, and against stricter gun control that Obama wants.

“Mr. President, I don’t oppose your plans because I want to protect the rich,” Rubio said, in a line representative of Republicans’ effort to shirk their caricature of a party favoring the wealthy. “I oppose your plans because I want to protect my neighbors.”

A rising star within the Republican Party who is regarded as a top contender for the Republican presidential nomination in 2016, Rubio used much of his speech to lay into Obama with familiar criticisms. He accused the president of demonizing the GOP for its resistance to the administration’s agenda.

“There are valid reasons to be concerned about the president’s plan to grow our government. But any time anyone opposes the president’s agenda, he and his allies usually respond by falsely attacking their motives,” Rubio said.

Rubio’s moment in the spotlight was eagerly awaited by many Republicans, but at one point the spotlight seemed to affect him: Rubio ducked to his left, and almost out of camera range, to pick up a small bottle of water and take a gulp.

The unusual break in the speech was quickly mocked on Twitter. Within minutes of the speech, Poland Spring — the brand that Rubio reached for — was a trending topic.

The Florida senator was part of a bipartisan so-called Gang of Eight who last month presented a framework for immigration reform. It called for securing the U.S.-Mexican border before dealing with the nation’s 11 million undocumented immigrants.

He sounded those themes again Tuesday and said: “First, we must follow through on the broken promises of the past to secure our borders and enforce our laws.”

Rubio devoted a sizable portion of his address to attacking Obama’s proposals on the federal budget. He said that he hoped the president would “abandon his obsession with raising taxes” and instead focus on economic growth.

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The senator, who said that he himself had only just paid off $100,000 in student loans, accused Obama of blaming President George W. Bush for a rising federal debt when Obama “created more debt in four years than his predecessor did in eight.”

Rubio’s speech sets the stage for this spring’s fight over Democratic and Republican proposals to resolve the so-called sequester — automatic spending cuts to government programs set to take effect March 1.

The Obama administration has said that the cuts would hamper economic growth and harm national security.

Rubio accused Obama of seeking “devastating” cuts to the military and said that the answer to the nation’s fiscal problems in stronger economic growth and creating “new taxpayers, not new taxes.”

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Rubio framed Washington fights over taxes and spending in personal terms. He spoke of retirees in his neighborhood who depend on Social Security, and how Medicare helped both his mother and his late father.

“I would never support any changes to Medicare that would hurt seniors like my mother,” he said. “But anyone who is in favor of leaving Medicare exactly the way it is right now, is in favor of bankrupting it.”

Republican Sen. Rand Paul of Kentucky, giving a separate response address to a tea party group, suggested that not only should the automatic spending cuts standing — they should be greater.

“Washington acts in a way that your family never could,” he said, according to prepared remarks. “They spend money they do not have, they borrow from future generations, and then they blame each other for never fixing the problem.”

If Congress can’t pay its own bills and pass a budget, Paul said, “Sweep the place clean.”

Updated at 2:42 p.m. ET: In the Budget Control Act of 2011, President Barack Obama and Congress created a fail-safe device intended to spur agreement on a “grand bargain” of spending reductions and tax increases. The law, enacted as part of an escape from a potential debt limit crisis, created the famous “super committee” of 12 members of Congress which was assigned the job of devising entitlement and tax reforms which would reduce deficits by $1.5 trillion over ten years.

But the law included a default option: if the committee failed in its mission, then automatic spending cuts, called “the sequester,” would begin.

Neither Obama nor most congressional Republicans were happy with the prospect of automatic spending cuts, but once the president put his signature on the bill, those cuts were built into the law. Congress, of course, was free at any point to enact a new law to undo the cuts, but so far it hasn’t done so. Now that the cuts are less than a month from beginning, Obama is again warning of their effects.

Related: Budget battle resumes

In his statement Tuesday he called them “massive automatic cuts” and “deep, indiscriminate cuts to things like education and training, energy and national security” which he said “will cost us jobs, and it will slow down our recovery.” A few minutes later for emphasis he repeated the phrase “indiscriminate cuts.”

On Saturday Deputy Defense Secretary Ashton Cater, in a speech at an international security conference in Munich, called the imminent cuts “huge and reckless” and said they would cause “devastating damage to the military.”

Nowhere in Obama’s statement Tuesday did he mention the exact dollar amount or percentage amount of the cuts that are slated to begin on March 1.

So how big are they? And are they “indiscriminate?"

To answer the second question first: in one sense, the cuts are not indiscriminate.

The Budget Control Act does in fact discriminate between entitlement programs, such as Social Security, in which benefit payments are automatically made to those people eligible for them, and what are called discretionary programs, such as the spending on the National Institutes of Health, the Federal Aviation Administration, or the National Park Service, which receive annual appropriations that can go up or down each year depending on the decisions of Congress.

For the most part, the cuts in the BCA exempt the entitlement programs: Grandma’s Social Security check is exempt, as is Uncle Pete’s veterans benefits check, but spending on NIH cancer research and on Zion National Park in Utah, for instance, is not.

As the Bipartisan Policy Center explained in a report last year, “The specified exemptions include Social Security, federal (including military) retirement programs, veterans benefits, Medicaid, and a host of other programs (mostly those benefitting individuals with low incomes). Furthermore, while Medicare would be subject to the sequester in the form of provider payment cuts, those cuts could not exceed two percent.”

But in another sense the cuts are indiscriminate in that they do not eliminate specific redundant or inefficient programs. The cuts are across-the-board to every federal department.

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Alex Wong / Getty Images

President Barack Obama makes a statement during a press conference at the Brady Press Briefing Room of the White House February 5, 2013 in Washington, DC.

How big will the cuts be in the current fiscal year?

Keep in mind that the current fiscal year, FY2013, began on Oct. 1 so Obama administration officials will have to implement 12 months’ worth of cuts in only seven months.

The Congressional Budget Office said in its annual budget forecast Tuesday that the automatic cuts will reduce spending by $85 billion in FY2013.

Even with the cuts taking effect, total federal spending will still be more than $3.5 trillion, a higher total than in FY2012. At 22.2 percent of gross domestic product in the current fiscal year, federal spending is high by the standards of the past 50 years. The 50-year spending average is 21 percent of GDP.

At the end of the Clinton presidency, a time which many people see as one of prosperity and when in fact there was a budget surplus, federal outlays amounted to only 18.2 percent of GDP. That’s partly because the economy was thriving, so the federal share of it was smaller than it would have been otherwise. When the economy is sluggish as it is today, federal spending – much of it automatic cash transfers in the form of entitlement spending – is relatively larger than it would be if the economy were flourishing.

The automatic cuts mandated by the Budget Control Act will reduce defense spending (other than spending for military personnel) by about 8 percent and non-defense discretionary spending by between 5 percent and 6 percent in FY2013, the CBO said Tuesday.

Members of Congress in both parties – especially those with military bases in their states or districts – have voiced alarm about the effect of the defense cuts. At last week’s confirmation hearing for Obama’s defense secretary nominee Chuck Hagel, Sen. Kay Hagan, D-N.C. told Hagel, “Stopping sequestration from occurring is very important to me. North Carolina -- we have seven military institutions -- installations, and we have over a hundred thousand active-duty service members in my state.”

The BCA cuts, she said, “are going to harm our national security, will impair our readiness, will defer necessary maintenance that will help keep our troops safe and delay important investments in research and procurement as well as stunt our economic recovery at this time.”

Hagan was one of 74 senators voting for the BCA in 2011.

At a press conference at the Capitol Wednesday at which Republican members of the House and Senate Armed Services Committees offered a proposal to avert spending cuts by means of cuts in federal civilian employee head count, Sen. Lindsey Graham, R- S.C. said, “We have our fingerprints as Republicans on this proposal, on this sequestration idea. It was the president’s idea, according to Bob Woodward’s book, but we as the Republican Party agreed to it. We got into this mess together and we’re going to have to get out together….. To the president: we bear responsibility as Republicans for allowing this to happen. Lead us to a better solution.”

Graham was one of the 26 senators who voted against the BCA in 2011.

UPDATED 4:09 p.m. ET -- The Congressional Budget Office projected Tuesday that the national debt will continue to grow over the next ten years even as the economy recovers, the unemployment rate falls, and tax revenues increase.

The report said, "At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion" and would be only half as large as the deficit was in 2009, relative to the size of the economy. But that improvement will be merely temporary: in the next several years, an aging population will drive entitlement spending higher at the very same time that rising interest rates increase the government’s debt-service costs, the CBO warned.

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In its annual Budget and Economic Outlook, the CBO said debt held by the public will be bigger by 2023 than in any year since 1951 and will be at 77 percent of gross domestic product (GDP) by 2023, far above the 40-year average of 39 percent of GDP.

As a result, the CBO report said, the federal government’s interest costs “will be very high” and will be rising. Interest costs will more than double by the end of the ten-year forecasting period and will be at their highest share of GDP in the past five decades.

CBO director Douglas Elmendorf emphasized to reporters Tuesday that in the past several years, the federal government has benefited from “an extraordinarily long period of extraordinarily low interest rates.”

Elmendorf also stressed that the pressures on the federal budget continue to be driven by the cost of the entitlement programs for older Americans.

Even though the rate of increase in health care spending – including Medicare spending -- has slowed in the past few years, “we still see substantial growth in federal health care spending” over the next ten years and beyond, Elmendorf said.

He noted that in the next ten years the number of people eligible for Social Security retirement benefits will jump by 40 percent. Most of those people will be eligible for Medicare benefits as well. 

“We are confronting now in our country changes of a sort we have not had to make in the past,” he said. If one looks at the 20 years before the 2007-2008 financial crisis, he said, “we had rising spending on Social Security and on the major health care programs that was offset as a share of GDP (gross domestic product) by a decline in defense spending.”

But “that’s not a strategy that can be repeated at that magnitude over the next 40 years, because defense spending has come way down as a share of GDP and because the demographic pressures” that are driving up Medicare, Medicaid and Social Security outlays “are so intense,” Elmendorf said. 

“We have a large budget imbalance, we have large projected deficits, a debt that will remain at a historically high share of GDP and will be rising at the end of the coming decade. What that implies is that small changes in budget policy will not be sufficient to put the budget on a sustainable path,” he warned. 

The CBO chief said a $4 trillion reduction in cumulative deficits over ten years would result in a balanced budget by the end of the ten-year period but to get that deficit reduction entirely from spending would require a two-thirds cut in all non-defense discretionary spending.

“The gap between spending and revenues is very large, and that means that changes you would need to eliminate that gap will be large relative to either outlays or taxes. It would even require large changes even if one split the impact between spending and taxes,” Elmendorf noted.

The CBO’s ten-year forecast assumes that the automatic spending cuts, or sequester, required by Congress and President Obama in the 2011 Budget Control Act, will remain in place.

But if Obama and Congress cancel the sequester’s spending cuts, the CBO said about $1.2 trillion more would be added to cumulative budget deficits over the next ten years.

The Budget Control Act’s spending cuts, which are scheduled to begin on March 1, will reduce defense outlays by about 8 percent and non-defense discretionary outlays by about 5 percent in the current fiscal year, the CBO report said.

On Tuesday Obama called on Congress to pass "a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months" while it comes up with a longer-term alternative.

If the Budget Control Act’s spending cuts are left in place, projected federal spending in the CBO’s forecast will average 22.1 percent of Gross Domestic Product over the period from 2014 to 2023, which is CBO's ten-year forecasting window.

That figure is less than the spending level in 2012, but it is high by the standards of the past 30 years, during which federal spending has averaged 21 percent of GDP.

The CBO estimates that tax revenues will increase by about $260 billion, or 11 percent, in the current fiscal year. About half of that increase in revenues is due to the Social Security payroll tax reverting to its normal 6.2 percent rate at the start of this year, after being cut to 4.2 percent as an economic stimulus measure in 2011 and 2012.

Elmendorf said the economy is growing stronger. “The good news is that the effects of the housing and financial crisis appear to be gradually waning,” he told reporters, predicting “a virtuous cycle of faster growth in employment, income, consumer spending and business over the next few years.”

But the tax increases enacted at the end of last year and spending curbs in the Budget Control Act will depress economic growth this year.

The CBO said the economy will grow at a real, inflation-adjusted rate of 1.4 percent this year and 3.4 percent next year, with the unemployment rate remaining high through 2014.

If the CBO forecast is correct, 2014 will be the sixth consecutive year with unemployment exceeding 7.5 percent, “the longest such period in the past 70 years.”

But the CBO forecast assumes that the jobless rate will fall to 5.5 percent by 2018. It was last at that level in the summer of 2008.

Each January, the CBO issues its budget projections for the next 10 years. The forecast is intended to guide Congress as it designs fiscal policy. The CBO projections assume that current law remains in place and that no new tax increases, spending cuts or fundamental restructuring of federal programs such as Medicare are enacted.

Veteran budget experts said Tuesday that it may require a U.S. sovereign debt crisis to finally force President Barack Obama -- or some future president -- and Congress to agree on truly fundamental changes in fiscal policy.

Last week’s overwhelming bipartisan agreement between Obama and Congress enacted modest income tax increases for most workers (an average tax hike of about $364 in 2013, according to the Tax Policy Center), a return to the full 6.2 percent Social Security payroll tax, and a two-month postponement of the “sequester,” the mandatory spending cuts required by the Budget Control Act. The deal made no changes in long-term spending or in the design of the entitlement programs such as Medicare.

Back in 2011, Obama signed the BCA into law in return for Congress agreeing to a higher federal borrowing limit. The law’s automatic spending cuts were designed to be the ultimate “action-forcing event” that would nudge Obama and Congress into clinching a historic bargain: entitlement reform and spending curbs combined with tax increases.

But three former Congressional Budget Office directors who assembled at a panel discussion Tuesday at the Urban Institute agreed that Congress’s attempt to design an action-forcing mechanism had failed. “I’m really at a loss for what kind of thing might cause the Congress to act in a sensible way,” said former CBO director Rudolph Penner. “We’ve reduced the credibility of something like a sequester. It’s just hard to come up with artificial crises of that sort.”

The BCA itself was supposed to be the action-forcing device – and it resulted only in postponing significant deficit reduction, not forcing it. According to the Congressional Budget Office, the deal Obama signed last week will increase spending and reduce tax revenues by nearly $4 trillion between now and 2022, compared to what would have happened if he and Congress had done nothing.

Another deadline – or another occasion for postponing action -- comes when the Treasury hits the government’s borrowing limit in late February or early March. Then at the end of March, an interim spending resolution expires. If Congress takes no action before that happens, parts of the government may shut down and federal employees could be furloughed for one day a month.

Penner said Tuesday that “those old warriors” – Vice President Joe Biden and Senate Republican Leader Sen. Mitch McConnell – might once again devise a stopgap, perhaps again postponing spending cuts and raising the borrowing limit.

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Penner said he saw no reason to change the forecast he has been making for a long time: “It’s going to take a sovereign debt crisis to get our leaders to act responsibly. If that does happen, I think groups like the AARP -- who have adamantly opposed even the tiniest of reforms of entitlement spending – will see that they have been very short-sighted. Their constituents will be hurt mightily” in a U.S. sovereign debt crisis by seeing their retirement savings evaporate amid a market crash.

A sovereign debt crisis would arrive if bond market investors concluded that the ratio of federal debt to U.S. national income was so high that it created doubts about full and timely repayment of money lent to the Treasury. Investors would force interest rates sharply higher to compensate for the perceived increase in risk.

Sovereign debt crises, or near-approaches to them, in Greece and other countries have resulted in dramatic cuts in government benefits without much advance warning, Penner said.  

He said he was puzzled that financial markets didn’t show a bigger reaction to the fiscal uncertainty in the run-up to last week’s accord, but he cautioned “markets tend to remain very, very calm as the budget situation deteriorates – until one day they don’t (remain calm). It’s not a gradual process…. These things are essentially impossible to predict, they can be set off by a bit of bad budget news on an otherwise slow news day.”

But former CBO acting director Donald Marron said his view was that “the hypothetical fiscal crisis for the United States is still many years in the future.”

Former CBO director Robert Reischauer warned that the Federal Reserve’s policy of keeping short term rates ultra-low “has eliminated one of the signals that the public and markets and (political) leaders look to in forcing action” on budgets. With such low interest rates, the federal government’s borrowing costs are not painful.

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The CBO reported Tuesday that there were signs of modest improvement in the budget picture in the short term: total tax receipts increased by 11 percent in the first quarter of fiscal year 2013 – and that came even before the tax increase that Obama signed into law last week. The 2013 fiscal year began on Oct. 1, 2012.

Spending was about the same in the first quarter of 2013 as it was during that period in 2012, when adjusted for shifts in the timing of certain payments due to weekends and holidays. Defense outlays were $9 billion (or 5 percent) less than in the same period last year.

But the bad news was that interest payments are already edging up, even without a sovereign debt crisis or a spike in interest rates.  The CBO said outlays for interest on the public debt were 7 percent greater than in the same period a year earlier, reflecting in part the growing debt held by the public.

For some Democrats, a lingering regret from last week’s deal is that Obama did not extract higher tax revenues; they worry that having agreed to income tax increases that largely fall on the top one percent of earners, the president won’t be able to persuade Congress to enact more tax increases this year or in 2014.

Larry Downing / Reuters

The Capitol Dome is seen on Capitol Hill, Nov. 9, 2012. To the left is the House of Representatives.

“The amount of revenue that was generated by the deal was far lower than the president and the Democrats had hoped for, and even lower than the amount the Republicans seemed willing at various times to put on the table,” noted Reischauer.

He added that last week’s deal will create the impression that higher income tax rates “are off the table in the future” – which he said was “very damaging” since higher federal revenues will be needed over the next few decades. He added that in order to provide the services and benefits Americans expect and to keep deficits and debt at sustainable levels, “we’re going to have to increase taxes on not (only) the (top) 1 percent, not the 2 percent, probably not the 20 percent, but the 30 or 40 percent of Americans. The sooner we face up to that, the sooner we can get on to other important issues that the government should be addressing.”

Noting that Obama had campaigned on sparing the middle class from having to pay any tax increases, Penner noted that that left the very high earners as the only source of more revenue. But, he said, “The arithmetic clearly shows that you can’t solve this long-run budget problem without the middle class making a contribution. The problem with rich people is that there just aren’t enough of them.”

Updated at 12:32 a.m. ET: An agreement to stave off the harshest and most immediate consequences of the fiscal cliff won approval in the House late Tuesday. President Barack Obama signed the law on Wednesday night, the battle over which foreshadowed more fights with Congress over spending.

Following a day of hectic wrangling on Capitol Hill — where the prospects for passing the bipartisan, Senate legislation regarding the fiscal cliff hung in the balance for much of New Year's Day — the House voted 257 to 167 to pass the belated compromise measure over the objections of many conservative Republicans.

The legislation takes steps toward resolving the combination of automatic tax hikes and spending cuts that took effect at midnight on Jan. 1. It preserves tax rates as they were at the end of 2012, except for those individuals earning more than $400,000 and households earning over $450,000. It also allows taxes on capital gains and dividends to go up, and extends benefits of the unemployed. Additionally, the Senate bill delays the onset of the "sequester" — the swift, automatic spending cuts — for two months. 

Fiscal cliff compromise leaves few satisfied

"Thanks to the votes of Democrats and Republicans in Congress I will sign a law that raises the taxes on the wealthiest of Americans," Obama said in remarks at the White House Tuesday, "while preventing a middle-class tax hike."

The House vote laid bare some of the internal ideological divisions to plague the GOP over the past two years. More Republican congressmen (151) voted against the Senate bill than for it (85), meaning that Democrats' support was needed to advance the final deal. House Speaker John Boehner, R-Ohio, took the rare step of casting a vote, and did so in favor of the legislation. Rep. Paul Ryan, R-Wis., the former Republican vice presidential nominee, also supported the package. But Boehner's top two lieutenants, Majority Leader Eric Cantor, R-Va., and Majority Whip Kevin McCarthy, R-Calif., each opposed the deal.

"Now the focus turns to spending," Boehner said in a statement following the House vote. "The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt."

While the last-minute action on Capitol Hill essentially mitigates much of the risk posed to the U.S. economic recovery by the fiscal cliff, it hardly brings resolution to the bitter and often intractable fight in Washington over taxes and spending. The first half of 2013 will feature battles in Congress over raising the debt limit, continuing basic government funding and the expiration of this two-month delay in the sequester. 

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Obama nodded to those looming fights in his remarks Tuesday evening, renewing his call for "balance" in any solution in the coming year to address deficits and debts. But the president also sternly warned Congress against using the debt ceiling as a bargaining chip, as Republicans had in summer of 2011.

"While I'll negotiate over many things, I will not have another debate with this Congress over whether to pay the bills they have racked up," Obama said.

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The fiscal cliff itself was the product of discord in Congress resolving those very issues. And the difficulty in attaining even this less ambitious piece of legislation — versus the kind of "grand bargain" Obama had first sought in talks with Republicans — offered a cautionary tale for the 113th Congress, in which the House and the Senate remain controlled by the same parties as during the past two years. 

Squabbling
And even for much of Tuesday, House approval of the fiscal legislation — which was negotiated by Senate Minority Leader Mitch McConnell, R-Ky., and Vice President Joe Biden — was far from certain. GOP leaders were forced to cajole conservatives who complained the fallback deal contained insufficient spending cuts. Only after it became clear that Republicans wouldn't have the votes to amend the Senate proposal — which the upper chamber said it wouldn't even consider — did House Speaker John Boehner, R-Ohio, bring the bill to the floor. 

The squabbling was familiar to any observers of Congress during the past two years. This divide almost resulted in a government shutdown and a default on the national debt in 2011. It again threatened Tuesday to allow the painful, across-the-board tax hikes and spending cuts to play out just as the U.S. economic recovery showed signs of accelerating.

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And this deal just approved by Congress in the waning hours of 2013's first day all but ensures that much of the coming year will be dominated by similar battles in Washington. Republicans are hopeful they might be able to extract more spending cuts and entitlement reforms with the government up against other deadlines, like the one needed this spring to authorize more government borrowing. 

That could complicate Obama's already-ambitious second term agenda. The president said just this past Sunday on NBC's "Meet the Press" that he will seek comprehensive immigration reform legislation and new laws to address gun violence.

In the debate over how to avoid going over the “fiscal cliff” of tax increases and spending cuts, much rhetoric has focused on what President Barack Obama is proposing to do on income tax rates, but that’s just a part of the overall revenue total the president proposed raising from higher-income earners in his budget blueprint.

Obama wants the top two marginal income tax rates to be 39.6 percent and 36 percent, instead of the current 35 percent and 33 percent.

Susan Walsh / AP

President Barack Obama speaks at the Rodon Group, which manufactures over 95 percent of the parts for K'NEX Brands toys, Friday, Nov. 30, 2012, in Hatfield, Pa.

But increasing the tax rates that apply to upper-income people is only a part -- less than a third -- of his longer-term tax proposal.

In the short run, Obama is urging the House to take up a one-year tax measure which the Senate OK’d earlier in the year on July 25.

“The Senate has already passed a bill to keep income taxes from going up on middle-class families,” Obama said in his weekly radio address on Saturday. “Democrats in the House are ready to do the same thing. And if we can just get a few House Republicans on board, I’ll sign this bill as soon as Congress sends it my way.”

He said once that bill is signed, then “we’ll have more time to work out a plan to bring down our deficits in a balanced way – including by asking the wealthiest Americans to pay a little more.”

That Senate-passed bill which Obama wants the House to pass would do the following for one year, 2013:

• Extend income tax rates enacted in 2001 for individual taxpayers making less than $200,000, for heads of households making less than $225,000 and for married couples filing a joint tax return who make less than $250,000 a year.
• Raise the top income tax rates on taxpayers above those thresholds to 36 percent and 39.6 percent.
• Increase the tax rate from 15 percent to 20 percent on dividend income and capital gains income for taxpayers whose income exceeds the threshold amounts above.
• Extend for a year the American Opportunity tax credit, a temporary tax break to offset college expenses which was enacted in the 2009 stimulus law, and extend for a year several tax breaks for low-income people which were part of the 2009 stimulus.
• Extend for one year the $1,000-per-child tax credit.

Altogether, the Senate bill would reduce tax revenues by about $250 billion, compared to the amount that would be collected if the current tax law expires as scheduled at the end of the year.

But as Obama said Saturday, he wants to enact longer-term tax changes.

And his most detailed public offer on tax policy can be found in his Fiscal Year 2013 budget proposal and the July update of that proposal.

If Congress were to enact the Obama tax rate proposal, that is, reinstate the 36 percent and 39.6 percent income tax rates for single taxpayers making more than $200,000 and for married couples making more than $250,000, the president's Office of Management and Budget says it would reduce cumulative budget deficits over 10 years by nearly $430 billion.

To put that $430 billion in perspective, the deficit for fiscal year 2012 was $1.1 trillion. So the ten-year total of revenue gained from raising income tax rates on higher-income people -- $430 billion  -- wouldn't eliminate one year's deficit, much less the deficits for the next ten years.

The Obama budget proposal calls for a much bigger tax increase on single people over $200,000 and couples over $250,000 -- a grand total of $1.4 trillion in deficit reduction over the ten-year budget period.

The tax rate increases account for only about 30 percent of the $1.4 trillion in revenue that the OMB says would be gained from Obama’s proposed tax increases on higher-income people.

Where would the rest of the $1.4 trillion come from? From limiting deductions and other tax preferences for upper-income people and from increasing taxes on dividends and capital gains.

Obama would limit the ability of married taxpayers filing a joint return with income over $250,000 and single taxpayers with income over $200,000 to benefit from a wide assortment of tax breaks: not only itemized deductions but also tax-exempt interest, employer-sponsored health insurance, and retirement contributions to 401-k and other retirement accounts.

If more revenue is the goal, could this same principle – limiting tax preferences – also apply to taxpayers who make less than $250,000? Many Congressional Democrats – especially those who represent states such as New York with high state and local taxes -- are opposed to that idea. For taxpayers in such states the ability to deduct state and local taxes is an especially valuable tax break.

Although it doesn’t seem to be part of the current bargaining between Obama and GOP Congressional leaders, there’s another tax increase on upper-income people that the president will get on New Year’s Day: the new broadened Medicare tax which will raise $20 billion in 2013 and nearly $40 billion by 2019.

Updated 11:43 am ET President Barack Obama’s fiscal cliff negotiator, Treasury Secretary Tim Geithner, predicted on NBC’s Meet the Press Sunday that congressional Republicans will accept Obama’s plan to raise income tax rates and limit deductions on people making $200,000 and over. “I think we’re going to get there,” he told NBC’s David Gregory.

He said if Republican leaders have their own alternative ways to reduce federal deficits, they need to offer Obama their proposals.

“We need to know what they’re prepared to do on (tax) rates and revenues and we need to know what they’re prepared to do on the spending side,” he said.

So far, Geithner said, they have not said “who should pay higher taxes.”

In contrast, Geithner said, Obama has been specific, for example, about how he’d shift more of the burden of paying for Medicare to affluent retirees: his fiscal year 2013 budget proposal would increase premiums and co-payments for higher-income Medicare beneficiaries, starting in 2017.

“If the Republicans don’t like those ideas and they want to do it differently (or) they want to go beyond that, then they have to tell us what makes sense for them and then we can take a look at it,” he said.

Geithner is leading the bargaining with GOP leaders on how to avoid the “fiscal cliff” –Washington jargon for the combination of tax increases and spending reductions which are scheduled to occur under current law at the end of the year and which the Congressional Budget Office has said would tip the economy into a recession.

With 29 days left to reach an agreement on avoiding the fiscal cliff, neither GOP leaders nor the president seem to be taking steps toward an accord.

Two senators who were re-elected last month, Sen. Claire McCaskill, D- Mo., and Sen. Bob Corker, R- Tenn., also appeared on Meet the Press to comment on the fiscal cliff negotiations.

Corker said he supported “closing loopholes” which he called "a pro-growth way of getting more revenues from wealthy Americans." He predicted that ultimately “cooler heads will prevail” and the two sides will agree on a deal.

Corker said that in the fiscal cliff bargaining Obama had not yet proposed additional curbs on Medicare and other entitlement spending and he predicted “you’re not going to have a deal until that happens.”

McCaskill said if current tax rates expire at year end, then “we would come back in January first thing and pass a tax cut” along the lines of Obama’s proposal. “Are the Republicans going to vote ‘no’ on that?” she asked incredulously.

On Medicare, McCaskill said she would support “more aggressive means testing from higher co-pays from those people who can afford it.” In his Fiscal Year 2013 budget blueprint Obama proposed higher premiums and co-payments for higher-income Medicare recipients, cutting $28 billion in federal spending over ten years.

But liberal Democrats have opposed that idea, saying it could erode support for Medicare among upper-income people, leading them to opt out of the program. “This will end Medicare as we know it,” said Rep. Allyson Schwartz, D- Pa., last spring when Republicans adopted Obama’s higher premium and co-pays idea as part of the negotiations over how to offset the cost of cutting the Social Security payroll tax.

Obama’s initial fiscal cliff bargaining position has been that income tax rates and tax preferences enacted since 2001 should remain in effect for single earners making less than $200,000 a year and for married couples filing joint return who make less than $250,000.

In a statement Sunday, House Democratic Leader Nancy Pelosi urged House Speaker John Boehner to bring to the floor a bill already passed by the Senate to continue current income tax rates for people making less than $200,000.

She said if Boehner "refuses to schedule this widely-supported bill for a vote, Democrats will introduce a discharge petition to automatically bring to the floor the Senate-passed middle class tax cuts." A discharge petition is procedure by which a bill may be forced out of a committee and onto the House floor for a vote. The Democrats would need to get 218 members of the House to sign a discharge petition in order for this procedure to succeed.

Republican leaders oppose any tax increase, although they would agree to a redesign of the income tax system that could raise more revenues for the federal government by ending or curtailing some deductions and other tax breaks.

The GOP leaders also want some plan for reductions in spending on Medicare and other entitlements.

The fiscal cliff refers to:

• The expiration at year end of tax reductions enacted in 2001, 2003, 2009, and 2010.
• A 27 percent cut in Medicare’s payment rates for doctors’ services.
• A ten percent cut in defense spending and an 8 percent cut in nondefense spending -- cuts mandated by the Budget Control Act which Obama signed into law in 2010 as a part of a deal with Republicans to get them to agree to raise the federal government’s borrowing limit.
• The end of emergency unemployment benefits.
• The end of a temporary reduction of 2 percentage points in the Social Security payroll tax which was in effect this year and in 2011.

In addition the Affordable Care Act will impose, starting in January, a new 3.8 percent Medicare payroll tax on income above $200,000 and will expand the tax to cover investment income as well as wage and salary income.

About two-thirds of the fiscal cliff comes from the impending tax increases scheduled to take effect at the beginning of 2013 under current law.

According to the nonpartisan Tax Policy Center, "Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire."

A report issued in October by the Center found that almost 90 percent of Americans would see their taxes rise unless Congress and the president agree to change current law. "For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts," the report said.

NBC's Tom Brokaw and Arianna Huffington, president and editor-in-chief of the Huffington Post Media Group, moderate a panel discussion on the jobs crisis and the diverse initiatives companies, nonprofits and foundations have undertaken to address it.

Updated at 12:40pm ET:  The director of the Congressional Budget Office, Douglas Elmendorf, said Wednesday that currently planned sharp cuts in spending and increases in taxes at the end of the year would cause “a dramatic reduction in the federal deficit” and “a significant tightening of fiscal policy” which would “probably lead to a recession early next year.”

Analysts refer to this as the “fiscal cliff.”

President Barack Obama and Congress face the question of whether to step back from the fiscal cliff by not allowing the current tax rates to expire at year end and by postponing the spending curbs mandated by last summer’s Budget Control Act.

Before year end, Congress must also decide whether to allow a 27 percent cut in Medicare payments to doctors to take effect – as required by a 1997 budget law -- or whether to put it off, as it has done for the past several years.

“We think that economic growth right now is being held back by the anticipation of this fiscal tightening, both in terms of the possibility of a sharp downturn, but also just uncertainty about what will happen,” Elmendorf told reporters at a CBO briefing.

“The sooner that uncertainty is resolved – especially if it is resolved in the direction of less fiscal tightening next year, then the stronger we think the economy would be” for the rest of this year and next year.

But Elmendorf warned that that alternative would also lead to unpalatable results.

If Congress continues the current tax rates and defers the spending cuts, there would be about two million more workers on the job than if it goes over the fiscal cliff, Elmendorf said. But there will also be higher federal spending, larger deficits, and higher debt over the next several years.

Under that scenario, “rapidly escalating federal debt would increase the risk of a fiscal crisis during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates,” Elmendorf told reporters.

The implication in the CBO’s updated forecast is that whether the next president is Obama or Republican Mitt Romney, he will be narrowly confined by budget and economic conditions created by Congress and Obama in their bargaining between Election Day and New Year’s Eve.

Elmendorf said the key issue facing Congress and the president “is not whether to reduce budget deficits” but when and how to do so. If Congress and the president do not cut the deficit in 2013, Elmendorf said, “They will need to reduce it later. At some point we will need to adopt policies that require people to pay significantly more in taxes, accept substantially less in government benefits and services or both.”

The CBO said in its budget update Wednesday that the government will rack up a $1.1 trillion deficit in the fiscal year which ends on September 30, the fourth year in a row of budget deficits exceeding $1 trillion.

As a percentage of gross domestic product (GDP), the deficit in the current fiscal year will be 7.3 percent.

Debt held by the public will reach its highest level since the Korean War and will be twice the level it was before the financial crisis and the recession.

The CBO report said that federal revenues in the current fiscal year will be about 6 percent higher than last year, while spending will be about 1 percent lower.

But remarkably, revenues in fiscal year 2012 will still be $133 billion less than what the federal government collected in revenues in FY2007, five years ago.

Revenues in 2007 were $2.568 trillion or 18.5 percent of GDP. In FY2012 they will be $2.435 trillion or 15.7 percent of GDP.

Much of the fall in federal revenues is “a natural consequence of the weakness of the economy,” the CBO chief said. “When incomes fall, taxes fall more than proportionately because we have a progressive tax code and people who slip down into lower tax brackets pay a smaller fraction of their income in taxes.”

But he added, “We are a little surprised by how weak tax revenues are, and we don’t know exactly what’s going on there." While CBO has the big-picture revenue numbers, the detailed tax data doesn’t become available from the Internal Revenue Service immediately.

A key variable in the CBO’s forecast is the government’s cost of borrowing, determined by interest rates. “Despite the surge in federal borrowing in recent years, net interest outlays are projected to hold steady at 1.4 percent of GDP through 2015, primarily because interest rates are expected to remain near historic lows for the next few years,” the CBO report said. But it predicted that interest rates will rise after 2015 and cause the government’s interest outlays to nearly double as a percent of GDP.

Matt Sullivan / Getty Images

President Barack Obama speaks at Capital University on August 21, 2012 in Columbus, Ohio. President Obama began a two-day tour of Ohio and Nevada to discuss the choice in this election between two different visions of how to expand the economy.

Broadening his attack on Republicans’ plans to curb federal spending, President Barack Obama campaigning in Ohio Tuesday portrayed GOP presidential candidate Mitt Romney and his running mate Paul Ryan, the chairman of the House Budget Committee, as intent on “gutting investments in education and science and infrastructure.”

Obama said in his speech at Capital University in Columbus, “Putting a college education within reach for working families just doesn’t seem to be a big priority for my opponent.”

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Judged by his ten-year budget blueprint which unlike Romney’s education proposal has actually been approved by one house of Congress, Ryan isn’t satisfied with the return the federal government is getting on its investment in education.

“While Federal spending on the Department of Education and related education programs has grown significantly over the past few decades, academic achievement has not seen a commensurate improvement,” Ryan said in the report accompanying his budget plan.

Ryan’s ten-year budget blueprint proposes to reduce some federal education outlays as part of its overall 12 percent cut in spending over ten years, for example consolidating and eliminating some of the 82 initiatives on improving the quality of teaching in public schools.

Under Obama, Congress has created a new tax break for higher education, the American Opportunity tax credit, as well as increasing the maximum size of Pell Grants by $900.

One focal point of the campaign debate has been what Ryan would do to Pell Grants, the single largest source of federal aid to low-income students for college education.

For the 2010-2011 academic year Pell Grants provided about $37 billion in aid to nearly 9 million students.

In his budget plan report, Ryan argued that “Pell Grants are the perfect example of promises that cannot be kept. The program is on an unsustainable path” due to legislation since 2007 including the Obama stimulus law that “made Pell Grants more generous than the Federal budget could afford.” He pointed out that the cost of the Pell Grant program has more than doubled since 2008, from $16 billion in 2008 to more than $36 billion in fiscal year 2013.

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While Obama has proposed a maximum Pell Grant award of $5,635 for 2013- 2014, Ryan’s plan proposes a maximum award of $5,550.

Ryan also wants to “ensure aid is targeted to the truly needy” by the changing the formula which the Department of Education uses to determine how much a student and his or her family can be expected to contribute toward the student’s college tuition.

Although some federal support for education is in the form of direct spending, such as Pell Grants, much of it is in the form of tax breaks, such as the Hope education tax credit (worth about $5 billion a year) and the deductibility of charitable contributions to educational institutions, worth about $6.5 billion.

A witness at last month’s Senate Finance Committee hearing on education, James White of Congress’s watchdog agency, the Government Accountability Office, testified there isn’t enough data to know which of the tax breaks is most cost-effective in getting students to finish college or university.

When Sen. John Thune, R- S.D., asked White if Congress were forced to pick only one education tax break, which one should survive, White answered: “Part of the problem here is that we are spending tens of billions of dollars on these programs and we don’t know the answer to the question you are asking.”

Some economists and tax policy experts have questioned whether the tax breaks for higher education aren’t contributing to an inflationary spiral.

Scott Hodge, president of the Tax Foundation testified to the Senate Finance Committee last month that federal subsidies for higher education are “fueling higher college costs by disconnecting student-consumers from the true cost of higher education. In turn, the benefits of these programs get capitalized into tuition costs because universities can boost tuitions without suffering the normal market backlash.”

(Hodge’s group aims for a “neutral” tax code that is designed simply to raise enough revenue for the government to function, without tax breaks for favored groups or industries.)

Obama noted in his speech in Ohio Tuesday that over the past two decades, tuition and fees at American colleges and universities have more than doubled.

“I put colleges and universities on notice: if they can’t stop tuition from going up, the funding they get from taxpayers will go down. We want to give them some incentive to start lowering tuition,” he said.

A question that for now is going mostly un-debated in all the 2012 speech-making is why America isn’t getting better outcomes from its education investments.

According to the Program for International Student Assessment (PISA), which tests students in 37 countries on their math, science and reading skills, average scores for U.S. 15-year old students were at about the average level for the entire group of 37 nations, but were below average in math.

Students in more than a dozen nations, including France, Finland, Australia, Japan, and Korea performed significantly better than American students on the PISA math test. Each of those nations also spends less per student than the United States does – on average about 30 percent less, according to the Organization for Economic Cooperation and Development (OECD).

“When we invest in your future, we’re investing in America’s future,” Obama said to students Tuesday at his Ohio campaign stop. “Businesses are mobile in the 21^st century economy – they can locate anywhere – so they’re going to create jobs and they’re going to hire wherever they find the best educated, most highly skilled workers. And I don’t want them to have to look any further than right here in Columbus, right here in Ohio, right here in the United States of America.”

He also said, “The fact is that countries that out-educate us today – they’ll be able to outcompete us tomorrow.” And according to OECD and PISA data, most of those countries are spending less on education and getting more educated students than the United States is.