Both Sides Must Give Ground to Avoid Fiscal Cliff
In his first formal press conference in months, Barack Obama showed that getting re-elected can increase a president’s confidence and combativeness. He staked out tough stands on several issues, especially on the looming budget negotiations.
Looking ahead to the “fiscal cliff” on Dec. 31, when the 2001 and 2003 tax cuts expire and sequestration cuts government spending sharply, Obama demanded $1.6 trillion of increased revenues as part of any budget bargain.
That’s twice the number he and Speaker John Boehner agreed on in the grand bargain talks in the summer of 2011.
Those talks fell apart when Obama telephoned Boehner and raised his demand to $1.2 trillion. Boehner refused, and as Bob Woodward describes in “The Price of Politics,” congressional leaders of both parties worked out their own approach. Sequestration, first suggested by Obama’s budget director, became part of the deal.
There’s a solid argument that limiting high earners' deductions could raise $800 billion or more. A $25,000 cap on deductions, according to The Wall Street Journal, would yield almost $1.3 trillion of additional revenue. The Simpson-Bowles commission showed that broadening the tax base could net $1.1 trillion.
And there’s a solid argument that raising tax rates on high earners, in conjunction with the increase that’s part of Obamacare, would slow down economic growth. That’s because many small businesses are taxed at the individual income tax rate.
Obama once accepted that argument, albeit reluctantly, when he temporarily abandoned his quest for higher rates in December 2010. Raising them, he conceded, would hurt while economic growth was still sluggish.
It’s actually more sluggish today than it was then, although as Obama pointed out in the press conference, we are further away from the sharp economic decline of 2008-09.
In effect, Obama is giving House Republicans a choice between a growth slowdown due to higher tax rates now and the much sharper slowdown that some economists predict – 5 percent is a number bandied about – if we go over the fiscal cliff.
The political leverage seems to be on Obama’s side, or so he seems to believe. Most of the media inevitably blame Republicans when Republicans and Democrats are not able to reach agreement.
Politico reports that a number of House Republicans, including some staunch conservatives, think they’ll have to give in on higher rates. Many members don’t want to defend them back home.
But there is also a force working against Obama: the gravity of the government’s fiscal condition. The president himself has recognized that entitlement programs are on an unsustainable trajectory.
Federal spending under Obama has been 24 percent to 25 percent of gross domestic product. Even in World War II, revenues never reached that level. Since that war, the highest level was 20.6 percent of GDP in 2000, when the government was flush with tax revenues from the capital gains of dot-com founders.
Growth does increase revenue in a progressive tax system like ours.
Several participants in the grand bargain negotiations, Woodward recounts, described them as trying to solve a Rubik’s Cube. Republicans wanted lower tax rates with base-broadening tax reform to provide added revenues, and they wanted changes in the trajectory of entitlements.
Democrats wanted higher rates on high earners but were not averse to broadening the tax base and were at least talking about entitlements.
The problem is not just reaching agreement, but reaching agreement on something that can get majorities in both houses of Congress.
Some members of both parties won’t vote for any bargain in which the other side gets something. So leaders of both parties have to persuade colleagues that they have made sufficient policy gains to warrant the policy concessions.
History shows that can happen. In Bill Clinton’s second term, he and Newt Gingrich reached agreement, with the aid of then-Chief of Staff Erskine Bowles, because there was something for both sides. Republicans got a capital gains tax cut, Democrats got S-CHIP (State Children’s Health Insurance Program), and they both got a balanced budget.
Clinton and Gingrich were even making progress on Medicare reform and negotiating about Social Security until the Lewinsky scandal erupted.
House Republicans have a majority and some leverage but cannot hope to prevail on all fronts. They may decide that higher tax rates are tolerable if they can make significant progress toward spending discipline and changing the trajectory of entitlements.
In summer 2001, Obama wasn’t able to produce such a package. Will the second-term Obama succeed?
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