Sunday, December 2, 2012

An Emboldened President Obama Lobs a Gernade, Is This the Ultimate Long Game?

I recall the tax debate of 2010 quite well.  President Obama had campaigned in 2008 on extending the Bush tax cuts for those making less than $250K per year and not continuing them for everyone else.  The debate took to the Sunday airwaves, but in the end the President blinked.  All of the Bush tax cuts were extended for two years, in addition to a new Social Security tax reduction of 2% for the next two years.  In the end, it was darn close to a complete victory for the GOP on taxes at least - although really very little happened to reign in the structural sources of spending.

We are 29 days from the fiscal cliff this time, so there is still a chance for the President to blink, but he is acting anything but compromising this time around.  His opening volley to the GOP, delivered by Treasury Secretary Tim Geithner to House Speaker John Boehner, is everything that liberals would want and conservatives would hate.  It includes:
* Allowing the Bush tax cuts for those making over $250K to expire
* Further reducing tax deductions on the wealthy to raise additional revenue
* Reducing Medicare benefits to upper income taxpayers
* Reducing farm subsidies
* Claiming credit for cuts that are naturally happening in Defense from the wind down of the wars in Iraq and Afghanistan

The GOP predictably hated the proposal.  It is basically a non-starter in the conservative GOP House.  I suspect it was quite obvious to the President that this would be the case.  I'm not sure he cares.

The President's basic negotiating mistake in almost every key piece of policy in his first term was negotiating from weakness.  The President has been giving away the farm before the conversation started and then negotiating from the compromise.  And often, there has not been a GOP counter-proposal, so the President has wound up negotiating with himself, putting forward increasingly conservative policy proposals until the GOP decides to accept one.

What the President is doing is daring the GOP to make a counter-proposal.  He's put forward the most popular tax increases - solid majorities favor raising taxes on the wealthy and put forward fairly vague promises of spending cuts against programs which are not particularly popular.

He is basically saying - "your move, John Boehner".

On the one hand, the President appears to hold all the cards this time:
* The Bush tax cuts WILL expire for everyone with no action, as will all the sequester spending cuts and the GOP is powerless to stop it without agreement from the Democrats
* Obamacare taxes and health insurance exchanges WILL take place under current law
* The President doesn't have to face re-election again - the House GOP does - you would think they have the larger incentive to get something done.

The GOP has held on to one card, however, and that is the federal debt ceiling.  It will need to be extended in 2013 and they can again hold it hostage for their goals, in spite of the potential damage to US credit.  But even on this topic, the President could go bold and claim constitutional authority to pay debts that are the result of previously authorized spending, although the constitution is fairly explicit in giving Congres the power to borrow money, not the President.  But it would likely be tied up in court for a while and be very bruising to the GOP's public image.

Did the President play a very long game to construct this situation?  There is a solid argument for it.  The "fiscal cliff" was set-up by three pieces of legislation that the President negotiated:
* The 2009 passage of Obamacare, which set the bulk of the associated taxes to go into effect on Jan 1, 2013
* The 2010 extension of the Bush tax cuts, which set them to expire on Jan 1, 2013, along with the payroll tax reduction
* The 2011 debt ceiling deal, which set the automatic sequestration cuts to go into effect on Jan 1, 2013

I noted all of this when I wrote about my proposal to whack the deficit by doing nothing - and that is certainly still an option available to the President.

Nobody in Washington wants to eat that many peas at once.  But, in negotiations that it appeared to everyone he was losing in 2010 and 2011, the President set up this gun to the head, where he can negotiate back from a policy base where all of the above things happen and, because of the timing he set up, he can do it all without having to worry about another election.

So, what will happen?

Privately, most in the GOP concede that they will have to give some ground on tax rates, although no one is talking about it in public.  A possible compromise would likely look something like this:
* Allow rates to go up some, but set the threshold higher than $250K.  It might look something like a 37 or 38% rate on incomes over $500K or $750K.
* Give some ground on Capital Gains and Dividends, allowing rates to rise, but not to the full level of ordinary income - perhaps increasing rates on both from 15% to 20%.
* Increase premiums in Medicare on higher income seniors
* Some reductions to domestic discretionary spending and defense spending, but less than would be automatically implemented in sequestration
* Some type of bi-partisan commission to study more fundamental tax reform.

The GOP realizes they have to give some ground to the President and that his hand is strong this time around.  But they probably won't give away the whole farm.

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