Fiscal Cliff Deal Could Show the Way Toward a Grand Bargain

With Republicans voting to raise taxes, Obama is in a strong position to challenge the new Congress to pass a fiscal grand bargain early in 2013, writes Will Marshall.

01.03.13 9:45 AM ET

The fiscal cliff deal finally passed by the House Tuesday night isn’t likely to lift the public’s rock-bottom esteem for the nation’s elected leaders. It took too long and delivered too little, and the spectacle of a Congress that can’t conduct the nation’s business except under extreme duress from self-imposed deadlines and penalties is infuriating. 

Still the outcome wasn’t terrible—and it shows that a grand fiscal bargain is still in reach, as our deeply polarized political class seems to be relearning the art of compromise. 

The deal is best understood as ratifying the 2012 election result. President Obama campaigned and won on explicit promises to raise tax rates on the rich. That mandate, plus the automatic expiration of the Bush tax cuts, left Republicans with no choice but to negotiate with the White House over narrowing the scope of the coming tax hike.

Had House Republicans followed Speaker John Boehner’s lead, they probably could have won significant spending cuts in return for reneging on their anti-tax pledge. But they didn’t, and the result was a one-sided victory for Obama, who got $620 billion in revenue from raising rates on very wealthy households, plus an extension of the stimulus tax breaks for low-income families and $30 billion in new spending on unemployment, without having to convince Democrats to swallow cuts in entitlements.

In effect, Republicans opted to give Obama his pound of flesh on tax rates now, and save the big battle over long-term debt reduction for the next Congress. They reckon the imperative of raising the debt ceiling early in 2013 will give them more leverage to demand spending cuts from the White House. That’s doubtful, because the public rightly sees GOP intransigence as the main obstacle to a grand bargain.

But the fiscal cliff deal shows that intransigence has its limits, as Republicans finally broke the conservative taboo against raising tax rates that party members have observed religiously for over two decades. Some 85 House Republicans defied the Tea Party and voted to boost tax rates—an outbreak of fiscal sanity that bodes well for the prospect of passing more sweeping reform this year. 

Especially delicious was the sight of Grover Norquist, the Grand Ayatollah of anti-tax orthodoxy, issuing a fatwa permitting Republicans to vote for raising rates. The ever-nimble Norquist seized on a technicality—a new budget baseline—that means the tax hike will actually be scored as a tax cut. It’s ironic that he would seek refuge in such Washington arcana—the very thing right-wing ideologues are supposed to hate. 

House Republicans have duly fallen into line, spinning their vote for the tax hike as merely the first step in making all the Bush tax cuts permanent. But such face-saving claims aren’t going to spare them the necessity of further revenue-raising. 

In another positive development, Boehner’s office issued a statement calling the vote a prelude to this year’s main event—tax and entitlement reform. This is a tacit concession to Obama’s demand for a “balanced” approach to debt reduction that roughly matches increased revenues and spending cuts. 

So the political stage is set for a second round of revenue-raising, this time by closing tax loopholes and/or capping tax deductions, rather than raising rates. Broadening the tax base could bring corporate tax rates down to globally competitive levels, and reform a flawed “worldwide” tax system that has left $1.7 trillion in U.S. corporate profits stranded overseas. And if Republicans are willing to really eliminate tax loopholes and preferences, that would give them an opening to reintroduce the idea of lowering personal income tax rates.

In any case, without further revenue increases, Democrats have absolutely no political incentive to engage in serious reform of entitlement spending. Although many liberals remain in denial on this point, every serious budget analyst knows that slowing the unsustainable growth of spending on Medicare, Medicaid, and Social Security is the key to getting federal spending under control over the long term. Alas, curbing entitlements is likely to split the Democrats almost as badly as raising tax rates has split the Republicans. 

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President Obama knows entitlement reform is unavoidable; that’s why he was willing to put a lower inflation adjustment for health and retirement benefits (“chained” CPI) on the negotiating table with Boehner in December, over many Democrats’ objections.

But without significantly more tax revenue, lawmakers would have to make truly draconian cuts in entitlements to fix the debt. They shouldn’t and they won’t.

Having won his point on tax rates, Obama is in a strong position to challenge the new Congress to pass a fiscal grand bargain early in 2013. Who knows, compromise may even prove habit-forming.