Fiscal Cliff

11.12.12

Who’s Winning the ‘Fiscal Cliff’

Hint: it’s not the GOP. Daniel Gross on the latest jockeying over the looming round of tax hikes and spending cuts—and why Obama has the clear upper hand.

Last Tuesday night, the brutal, endless presidential election ended. Last Wednesday morning, what promises to be a shorter, but equally brutal, process began: the effort to stave off the collection of tax increases and spending cuts that are slated to take place on Jan. 1. Most analysts have viewed the upcoming fiscal cliff as a test of our governing capacity. I view it as a hostage situation.

In a stunning role reversal, President Obama and his congressional allies are now holding the Bush-era tax rates on income and capital hostage, while the Republican Party struggles to figure out a ransom strategy.

In any negotiation, if you are the only party putting forth proposals, then you’re losing. And on Sunday, Day 5 of the hostage crisis, it was clear that the Republicans were beginning to break down.

Preelection, the Republican line on taxes was something like this: Bush tax cuts on capital, income, and estates should exist in their current form forever—no ifs, ands, or buts. Also, existing loopholes and deductions were generally fine. Any deficit reduction should be accomplished through spending cuts alone. In a primary debate, when asked if they would accept a deficit reduction deal that had $10 in every cut for every $1 in new taxes, every GOP candidate said that would be unacceptable. By presenting a united front during debt-ceiling negotiations, Republicans generally got what they wanted from President Obama during his first term. In August 2011, John Boehner crowed “I got 98 percent of what I wanted.”

That’s not likely to happen this time around. Sure, there was a certain amount of defiance from the likes of Senate Minority Leader Mitch McConnell. But a new talking point quickly emerged among the GOP. Maybe it is OK to have more revenues as part of a deficit-reduction deal—just as long as tax rates don’t rise. Instead, let’s curtail some deductions that rich people use to great effect. That was Boehner’s opening gambit earlier in the week. And it has been repeated by other Republican worthies.

Of course, this is a nonstarter for a host of reasons. This was Romney’s (losing) pitch during the campaign. And like Romney, the Republicans who advocate limiting deductions and closing loopholes in principle are not willing or able to list them in reality. Why? The big-ticket ones, like the deduction for charitable donations, or the deduction for home mortgage interest, are immensely popular and have powerful lobbying organizations behind them. Still, this is a significant step. Before entering negotiations, Republicans have conceded that more revenues are needed, and that they will have to come from having the wealthy pay more taxes than they do now.

A second breakdown in the façade came from Lindsey Graham, the Republican senator from South Carolina. On Sunday, Graham endorsed the Bowles-Simpson deficit-reduction framework and urged President Obama to do the same. Now, the Republican budget establishment had generally not approved of Bowles-Simpson plan when it was released. Rep. Paul Ryan, who on the commission, voted against it. Why? Ryan said it was because it didn’t cut spending on health care deeply enough. But the plan also foresaw the expiration of the Bush tax cuts and further tax reforms. Combined, as Suzy Khimm reported in The Washington Post, they would basically make Bowles-Simpson a deal in which every dollar in reduced spending was met by a dollar in increased revenue. Again, that is now Graham’s opening bid.

Elsewhere, Republicans began to wave the white flag of surrender. The orthodoxy used to be that nobody should pay more taxes, and that nobody wants to pay more taxes. On Sunday, prominent GOP-ers violated both taboos. And they did not on Morning Joe, or Charlie Rose’s show, where right-wingers go to burnish their centrist credentials, but on Fox. Sen. Bob Corker of Tennessee, appearing on Fox News Sunday, said: “We know there has to be ‘revenues.’ And, I think, I haven’t met a wealthy Republican or Democrat in Tennessee that is not willing to contribute more as long as they know we solve the problem.”

President Obama may not realize, but he’s holding all the cards.

Even worse, for the GOP’s cause, was Bill Kristol, who seemed to actively advocate Obama’s premise that high-income earners didn’t deserve lower marginal tax rates. “Don’t scream and yell if one person says, ‘You know what? It won’t kill the country if we raise taxes a little bit on millionaires.’ It really won’t, I don’t think,” Kristol said. “I don’t really understand why Republicans don’t take Obama’s offer to freeze taxes for everyone below $250,000, make it $500,000, make it $1 million,” he continued. “Really? The Republican Party is going to fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood?” Of course, Kristol is more of a foreign policy hawk than an economic one. But still, for the editor of The Weekly Standard to come out and say that the Republican Party shouldn’t go to the mat to preserve lower marginal tax rates for millionaires is quite a concession.

So far, these bids have generally been met with the proper response: silence. President Obama may not realize, but he’s holding all the cards. As the fiscal cliff approaches, and as businesses and the wealthy—the core constituencies of the GOP—start to get ever more agitated, the pressure will mount on Republicans to get a deal done. The longer the Obama administration refuses to engage, in fact, the more open the GOP will be to a deal, and the more likely it is to happen.