Which side will blink first in showdown over taxes?
With the election behind us, I had hoped our politicians would get beyond games of chicken. No such luck.
First, you need to understand that the upcoming game of chicken isn’t about how much or when we cut the budget deficit, or even whether the fiscal cliff poses a danger to the economy.
The nonpartisan Congressional Budget Office warned recently that the automatic tax increases and spending cuts scheduled to start in January amount to too much deficit reduction too soon. They’d put the economy back into recession and push unemployment to about 9 percent. But the CBO also warned of an economic crisis ahead if the United States doesn’t stem the growth of the nation’s exploding deficit.
That’s the bind we’re in. Reduce the budget deficit too quickly, and we’re in trouble. But fail to address the deficit, and we’re also in trouble.
It’s really a matter of timing. That’s why I think any deal should include a trigger mechanism that begins to cut spending and raise taxes when the economy has two consecutive quarters of 6 percent unemployment or less and 3 percent annualized growth or more.
But the next game of chicken in Washington isn’t really about any of this. It’s about the clearest issue President Obama and Mitt Romney fought over: whether taxes should be raised on the rich.
Democrats and Republicans are now maneuvering to maximize their bargaining leverage when they sit down next year to decide this.
Days after his re-election, the president called on Congress to immediately make permanent the tax cuts for Americans who make less than $250,000 a year, while at the same time allowing tax rates to rise for wealthy Americans — and then making those rates part of a broader deal next year.
Meanwhile, House Speaker John Boehner, R-Ohio, has proposed that all the tax cuts — including those for the rich — be extended until next year, until there’s a deal. “I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us,” Boehner said.
So what’s going to happen? Bear with me, because this gets interesting.
The president knows Republicans won’t make permanent the tax cuts for people earning under $250,000 without also making them permanent for wealthier taxpayers. So how will Democrats force the GOP’s hand?
Democrats figure they’ll have most of the bargaining leverage in next year’s deal if they do nothing now, allowing tax rates to rise automatically on everyone in January. Then they’ll offer Republicans a deal that reduces taxes on people earning less than $250,000 — which would be retroactive to Jan. 1. So we’ll go over the fiscal cliff, but because the subsequent deal is retroactive, it will be more like a gentle hill than a cliff.
Democrats believe this will trap the GOP, because Republicans will then have to choose between a tax cut for the middle class or no tax cut at all. And given their ideological commitment to cutting taxes, Republicans will have to go along with a tax cut on the middle class.
But Republicans figure they’ll have more bargaining leverage if they keep things as they are until February or March, when the debt ceiling has to be raised again. This way, Republicans can again threaten to vote against raising it unless they get their way on taxes.
This is why Boehner wants legislation that will keep the government spending and taxing at current levels right through the start of the year, and thereby avoid the fiscal cliff.
So who blinks first? Democrats, who don’t mind going over the cliff because they’ll get a better final deal — and the deal will be retroactive to Jan. 1, so it’s not really a cliff at all, but more like a little hill? Or Republicans, who want to extend the Bush tax cuts beyond Jan. 1 until we get sufficiently close to the debt ceiling that they can once again threaten the full faith and credit of America?
Remember, if nothing is done between now and January, tax rates automatically rise on everyone at the start of the year. That means Obama and the Democrats are in the strongest position right now. Let’s hope they don’t blink.