December 31, 2012

Senate Majority Leader Harry Reid (J. Scott Applewhite / Associated Press)

Now that President Obama and Rep. John Boehner have given up their talks on the fiscal cliff, the ground has shifted to the Senate, where Majority Leader Harry Reid is negotiating a deal with Minority Leader Mitch McConnell. The latest news to come out of said negotiations is the revelation that Democrats have agreed to pare back their demands for tax increases.

As The Post reported, Democrats have agreed to raise the income threshold to $450,000 from $250,000, meaning that the Bush tax cuts would remain in place for all income below the former. What’s more, the threshold for the estate tax will remain at $5 million — it is scheduled to drop to $1 million. In return, Democrats get an extension of unemployment benefits — no payroll tax cut, no stimulus.

It’s a much smaller deal than the one discussed when fiscal cliff negotiations began in earnest, following the presidential election, and it reflects in odd reversal of circumstances.

Just last month, it was widely assumed that Democrats held the leverage in any negotiation. Not only did President Obama win reelection on a message of higher taxes for the wealthiest Americans, but the actual mechanism of the fiscal cliff— automatic tax increases on all Americans, beginning Jan. 1 — gave Obama space to drive a hard bargain. And indeed, his initial offer on the fiscal cliff was promising: $1.6 trillion in new revenue, unemployment insurance, billions in new stimulus, a permanent fix for the debt ceiling, and several hundred billion in undefined spending cuts.

Of course, Republicans rejected this offer. And given their power in the House of Representatives, Obama had no choice but to make some concessions. But in his apparent zeal for a “grand bargain,” he went further, lowering his ask for revenue and floating cuts to Social Security in the form of “chained consumer price index,” a different way to measure inflation and calculate benefits. Republicans rejected this as well, and talks between Obama and Boehner fell apart.

The current Democratic offer is even further from ideal than the one presented by President Obama, and it represents a huge erosion of leverage. Republicans are now the ones in control, and as Jonathan Chait notes, it has everything to do with the president’s willingness to cave on taxes and his genuine desire to avoid the fiscal cliff. The White House doesn’t seem to think that it has much leverage after Jan. 1, or at least that any deal it gets after taxes go up will lack important elements like unemployment insurance.

I think this is mistaken. As President Obama himself noted in his interview with David Gregory yesterday, Republicans are most focused on reducing tax rates on the wealthiest Americans. In the post-cliff environment, taxes on the wealthiest will go up far above of what Democrats want. If low taxes are their goal, Republicans have no choice but to come to an agreement, and it’s there that Democrats can draw terms to their advantage.

There’s still time for the White House to embrace this and prevent further concessions to the GOP. But if President Obama remains committed to getting a deal done before the new year, then in all likelihood, it won’t be favorable to his short-term or long-term interests.

Jamelle Bouie is a staff writer at the American Prospect, where he writes a blog.