It’s day eight of the fiscal cliff hostage crisis situation. And while a resolution still seems far off, there have been some significant changes. For the first time, President Obama, the holder of the hostage, has issued his demands. And a new set of external players is entering the scene: America’s chief executive officers.
Here’s the state of play. Come Jan. 1, the U.S. will go over the fiscal cliff. The Bush-era low tax rates on income, capital gains, dividends, and estates will expire. At the same time, automatic cuts that will affect defense contractors and other industries dependent on government will kick in. In the wake of last week’s election, President Obama came into control of items that Republicans in Congress desperately want. If Obama simply sits back and does nothing, the wealthy will have to start paying more taxes and the greatest Republican legislative achievement of this young century will disappear in a matter of weeks.
In previous installments, we’ve documented how Republicans have already made significant concessions—first acknowledging the need for more revenues in any deal, and then saying those revenues should come primarily from eliminating tax breaks for the wealthy. Meanwhile, Democrats have generally stood fast and have increased their demands.
The last 24 hours have brought new developments. First, President Obama has laid out a marker for a grand bargain—and it’s a much more aggressive one than he has put out there previously. The Wall Street Journal reported, in advance of a meeting Friday with congressional leaders, Obama is calling for “$1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.” Ouch. For those counting at home, that’s twice as much as was on the table just 13 months ago. As for the Republican suggestion that all the revenues come from tightening tax deductions and loopholes? Forget about it. Treasury Secretary Tim Geithner, appearing at a Wall Street Journal event, said Obama is “not prepared to extend the upper-income tax cuts.” So as Republicans edge closer to the Democrats’ position, the Democrats are moving away from the Republicans.
Now, America’s CEOs are getting involved. This evening, President Obama will meet with a group of top bosses at the White House to discuss the fiscal cliff and other economic issues. Among those attending: Pepsi CEO Indra Nooyi and GE CEO Jeff Immelt. To the extent corporate America got involved in the 2012 election, it was generally on the side of Mitt Romney. Lobbying organizations like the Chamber of Commerce funded huge anti-Obama advertising campaigns, while lots of CEOs contributed to anti-Obama Super PACs.
In the precincts of the rich, there is rising acceptance that their personal tax rates will be higher next year.
In effect, CEOs, especially Wall Street CEOs, went all in on a Romney victory. But as pragmatists, they have come around rather quickly. Many CEOs are genuinely freaked out at the prospect of the fiscal cliff. “At a Wall Street Journal CEO conference in Washington, 73 percent of participants said their primary concern was the so-called fiscal cliff,” the Journal reported Wednesday. But the bosses seem to be more worried about the impact of a slowdown on their companies’ bottom lines than on their own. An informal show of hands at the conference showed many of the CEOs were personally willing to pay higher taxes to reduce the deficit. In the precincts of the rich, there is rising acceptance that their personal tax rates will be higher next year.
Goldman Sachs CEO Lloyd Blankfein took to the op-ed page of The Wall Street Journal to offer an olive branch of sorts. Expressing concern that the fiscal cliff would “derail the fragile recovery,” he urged Congress to act. He accepted the premise that revenues must be part of the deal. “A number of CEOs and companies agree and support principles that call for a comprehensive and balanced solution to the debt problem—increased tax revenues and decreased spending,” he wrote. Blankfein also seemed to accept that tax rates on personal income would have to go up. “Broadening the personal income-tax base by closing loopholes will generate substantial additional revenue while minimizing increases in marginal tax rates [my italics] that could stifle risk-taking and robust growth.” Notice the small but important change here: increases in tax rates on personal income should be minimized, not ruled out. In other words, Blankfein’s position is quite closely aligned with Geithner’s.
Now, Blankfein doesn’t speak for the Republican Party any more than Robert Rubin speaks for the Democrats. But to have the CEO of one of America’s most powerful investment banks publicly make the case that it is OK for marginal tax rates to rise is significant. It’s amazing the difference a week makes.