Obama’s “small deal” could lead to bigger tax increases

December 22, 2012

The juiciest passage in the Wall Street Journal's behind-the-scenes report on the fiscal cliff negotiations comes when House Speaker John A. Boehner (R-Ohio) asks President Obama whether he can have the deal he rejected in 2011. "You missed your opportunity on that," the president replies.

Ouch. 


It was supposed to be a friendly staring contest, but it quickly became clear that it was so much more. (Jewel Samad / AFP/Getty Images)

But the most important insight into the White House's strategic thinking comes when Boehner says to the president, "I put $800 billion [in tax revenue] on the table. What do I get for that?" Obama's response is cold and telling. "You get nothing," the president said. "I get that for free."

That, right there, is the central fact of negotiations for the Democrats and the central problem for the Republicans. At the end of this year, more than $5 trillion in scheduled tax increases begin. But the White House doesn't believe that's real revenue. Democrats in Congress won't permit that kind of a tax increase on ordinary Americans. The White House won't permit that kind of a tax increase on ordinary Americans.

But they're certain they can hold onto almost $800 billion of it. The Senate already passed a bill letting the Bush tax cuts lapse for income over $250,000. That bill is very, very popular. The White House expects that if we go over the cliff, the House will have to pass that bill, too, and the president would have little choice but to sign it. That bill raises taxes by a bit more than $700 billion, which is less than the $1.6 trillion the White House wants. But that $700 billion, to the White House, is the baseline: If they get nothing else, they will certainly get that.

And that's why Boehner's offer of $800 billion doesn't impress. The White House already has some $700 billion in the bank, as they see it. The reason to negotiate with Boehner is that an agreement with him could, in theory, push that number well above $1 trillion while stabilizing the debt and avoiding the economic pain of falling off the fiscal cliff. But there's no reason to cut a deal with Boehner in which the White House gives up spending cuts in order to get a tax increase they can have anyway. 


(Source: Dylan Matthews/The Washington Post)

The talk in Washington now is about a "small deal." That would likely include the Senate tax bill, some policy to turn off at least the defense side of the sequester and a handful of other policies to blunt or delay various parts of the fiscal cliff.

That's not a very good deal for the short-term health of the economy. Depending on how much of the fiscal cliff gets delayed, we could tip into recession anyway. But it could lead, in the end, to much more revenue than a "big deal" now.

Here's how it would go. Some time in the next month or so, the small deal would pass and the White House would pocket that $700-plus billion in tax revenue. They really would get that for free, just as the president told Boehner. 

But pressure would quickly mount to strike a larger deal, both because there would be another fiscal cliff coming and because the debt ceiling would need to be raised. (The White House swears they won't negotiate over the debt ceiling, but it's not exactly clear what that will mean in practice.)

The White House would insist that the next deal includes a 1:1 ratio of tax increases -- all of which could come through Republican-friendly tax reform -- to spending cuts. So a subsequent deal that included $600 billion or $700 billion in spending cuts would also include $600 billion or $700 billion in tax increases, leading to total new revenue in the range of $1.2 trillion to $1.4 trillion. 

There's precedent for this. After the 2010 midterms, Republicans forced the passage of the Budget Control Act, which included more than a trillion dollars in spending cuts and no offsetting tax increases. They've subsequently refused to count those cuts toward any future deals. If the president, after winning the 2012 election, pocketed $700 billion in tax increases and insisted that revenue was unrelated to the next negotiation, he'd simply be following Boehner's lead.

All of which is to say, if Boehner had taken the White House's deal in 2011, he could've stopped the tax increase at $800 billion. If he took their most recent deal, he could stop it at $1.2 trillion. But if he insists on adding another round to the negotiations -- one that will likely come after the White House pockets $700 billion in tax increases -- then any deal in which gets the entitlement cuts he wants is going to mean a deal in which he accepts even more tax increases than the White House is currently demanding.

Today, Boehner wishes he'd taken the deal the president offered him in 2011. A year from now, he might wish he'd taken the deal the president offered him in 2012.

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Dylan Matthews · December 22, 2012