What’s The Difference This Time?

November 16, 2012 Current Commentary Comments Off
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Barring an all-out conflagration in the Middle East, President Obama will lecture congressional leaders today over his demand for higher taxes on the wealthy as part of any deal to avoid the so-called fiscal cliff.

These are the same congressional leaders with whom Obama collaborated to create the cliff in the first place. When Democrats and Republicans could not otherwise agree on deficit-cutting measures as part of a deal to increase the debt ceiling last year, they decided to compromise at the extreme: a package of tax increases and spending cuts to go into effect in 2013 that was so severe as to be – they believed – unthinkable. “We can’t work together now, but we can create a situation so dire that we will be forced to work together later,” was their message to the country.

Now it’s later. We will soon see if the gambit worked.

These are also basically the same congressional leaders with whom Obama reluctantly agreed at the end of 2010 to extend all the Bush-era tax cuts, including those targeting the affluent, for an additional two years. That deal also revived the estate tax after a one-year hiatus, with more generous exemptions and less onerous rates than during the Bush phaseout. Back in 2010, Democrats still controlled the House of Representatives in the lame-duck session, led by Nancy Pelosi. She had to deliver Democratic votes to get the package passed. This time Pelosi leads a House minority, whose votes Republican Speaker John Boehner does not need if he can hold his own caucus together.

The president is not a recent convert to the cause of higher taxes for the well-off. He got steamrolled in that position in 2010 and 2011, so with the same players in place, what is different about 2012?

Obviously, the president no longer has to worry about his own re-election prospects. He can be as firm (or as unreasonable, depending on your point of view) as he wants without fear of suffering at the polls. He also does not see much downside in holding out for his targeted tax increase, since he views the election as a referendum on that issue. There are always quite a few people in favor of raising someone else’s taxes.

On the other hand, members of Congress from both parties are still concerned with facing voters in the future. Obama will warn Republicans that if they block a deal in order to retain lower tax rates for “the rich,” and the economy subsequently falls off the fiscal cliff and lands in some cosmic cesspool, they might very well take the heat in 2014. More pointedly, he might ask them: Given your firm opposition to higher taxes, and the fact that the increases I want will only affect around 2 of every 100 American households, are you really prepared to let rates rise for the other 98 percent – or at least the half that pay some income tax – to protect the 2 percent?

This position might work, so of course the president will take it.

Republicans are showing some flexibility as they enter the lion’s den at 1600 Pennsylvania Avenue. They may be willing to increase revenue by curbing deductions, especially for higher-income taxpayers. This echoes a sensible position that Mitt Romney advocated during his campaign, which is finding some favor among Democrats too, as I suspected it might.

But having scored his Electoral College touchdown, the president seems to want to spike the ball in his opponents’ faces. He said at his news conference Wednesday that “loophole” closing (for the non-tax-experts, “loopholes” are otherwise legitimate deductions that are claimed by people other than you) is not going to be enough. He sees raising rates as a matter of principle. As he put it, “What I’m not going to do is extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars.”

This language grates on Republican ears. The president was nearly the last person in Washington to learn that his chief spook and favorite general was playing footsie with his designated scribe, yet somehow he knows that a family earning $250,000 in a place like San Francisco does not “need” to avoid a tax increase? Somebody should remind the president that for many such taxpayers, rates have already increased at the state level, and those same families will face higher federal taxes next year, regardless of the cliff, to pay for the Obamacare legislation.

Republicans may not roll over the way the president apparently hopes. They have some cards of their own to play. Despite the president’s victory, nearly the entire cast of House Republicans who opposed him last year also won their re-elections. Their constituents largely agree that the president’s approach is wrong. Most of them think the federal government just spends too much, and that giving it more revenue will give it more to spend.

A lot of these Republicans want to amend the U.S. Constitution to require a balanced budget. Most economists and nearly all Democrats think this is an awful idea. I do too. But the Republicans may bring out their biggest weapon, which is Obama’s reliance on them to approve an increase in the federal debt ceiling.

The Treasury will once again be nearing the ceiling as 2013 begins. Democrats proclaim the end of the world is at hand if the ceiling is not lifted. What would actually happen would be the functional equivalent of passing a balanced budget rule with no phase-in period. Suddenly, the government would have to stop increasing its debt. It could still spend, but only the money that came in less the cost of interest on the existing $16 trillion debt pile. A lot of hard choices would have to be made, fast.

It wouldn’t automatically mean default. The Treasury would sell new debt, to the Federal Reserve if necessary, to replace maturing obligations. There is enough revenue to pay the interest, thanks in part to the Fed’s ultra-low-rate policies. But other spending would be severely restricted, and the pain would be extreme and widespread.

Nobody wants this, but Democrats don’t want it more than Republicans don’t want it.

So each side has some leverage. The end result, when all the posturing is done, is likely to be some form of “revenue enhancement,” maybe with higher rates, along with an agreement to work on broader tax reform during the next year or two. The consolation prize to Republicans who loathe higher tax rates may be a more generous set of estate tax rules. That tax, which is really a tax on thrift and is detested by most of the GOP, is set to revert to 55 percent and a $1 million per person exemption, from 35 percent and $5 million exemptions under current law. A compromise might keep something close to the current levels, or it might even go the full distance and repeal the estate tax once again. The world did not end when the tax went away in 2010.

That’s a compromise that both sides might be able to live with. The president would get more current income from the well-to-do, while the well-off would at least know that they could preserve and grow wealth for their heirs without having a large share turned over to the government when they die.

What’s different this time? Not much, really. Except that both sides might be ready to at least acknowledge the other’s position, and to give the opposition enough of what it thinks it needs to get a deal done.


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