Why the White House thinks it’s winning the ‘fiscal cliff’

December 31, 2012

Consider the ongoing fiscal cliff negotiations from the White House's perspective.

The specifics of the potential McConnell-Biden deal are fluid, but the bottom line, at the moment, seems to be this: It raises taxes by $600 billion over 10 years, secures important Democratic priorities like unemployment insurance and the stimulus tax credits, and doesn't include any spending cuts of note.

Here are the details, as multiple sources close to the talks have described them to me: The top tax rate rises to 39.6 percent for individuals making more than $400,000 and families making more than $450,000. Capital gains and dividends will be taxed at 20 percent with the same income thresholds. The Personal Exemption Phaseout (PEP) is set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000. The AMT is patched permanently. The estate tax would exempt estates up to $5 million and tax them at 40 percent above that.

The various business tax credits -- R&D, wind, etc -- would be extended through 2013, as would unemployment insurance. The stimulus tax credits -- namely, the expansions of the Earned Income Tax Credit, the Child Tax Credit, and the college credit --  would be extended for five years, which is hugely important to the White House. The scheduled cuts to doctors in Medicare would be averted for a year through spending offsets that neither side considers injurious. The treatment of the sequester is still up in the air, as the president is refusing to offset it unless revenues are part of the mix.

It would be going too far to say White House officials are thrilled with this package. But it looks pretty good to them. As they see it, it sets up a three-part deficit reduction process. Part one came in 2011, when they agreed to the Budget Control Act, which included more than a trillion dollars in discretionary spending cuts. Part two will be this deal, which is $600 billion -- and maybe a bit more -- in revenue. And part three is still to come, but any entitlement cuts that Republicans want will have to be matched by revenues generated through tax reform. If Republicans want $700 billion in further spending cuts and the White House insists on $700 billion in tax reform, they'll end up with more revenue than in Obama's final offer to House Speaker John Boehner.

The White House laughs off the GOP's theory that they can use the debt ceiling to extract big spending cuts without any further tax increases. For one thing, Boehner wouldn't know how to achieve his "dollar-for-dollar" rule if you gave him total control of the budget. Raising the debt ceiling will cost around $1.5 trillion through 2014. Boehner has never named spending cuts even in the neighborhood of $1.5 trillion. In fact, he's never named many entitlement cuts at all. Republicans actually seem terrified of entitlement cuts.

"You either cut Medicare or we default the country?" Asks one top Democrat, describing the fight the GOP is setting up. "And we don’t have the guts to put out our Medicare cuts so you need to put them our for us? And now you need to round up the Democratic votes to help us blackmail you? That's the plan?"

The White House likes where the McConnell-Biden negotiations are going. (AP Photo/Charles Dharapak)

One problem the White House is having is that their congressional allies don't see it the way they do. "The direction they're headed is just absolutely the wrong direction for our country," said Sen. Tom Harkin, a Democrat from Iowa, on the Senate floor today. A top Senate staffer on the Democrats' side e-mailed me with a similar sentiment. He'd heard the McConnell-Biden deal was in the range of $660 billion. That's "$940b below the President’s initial position, $340b below Boehner’s last offer, and $140b below the $800b the President told Boehner he gets for free," he griped.

Nor is there much confidence that the White House will be willing and able to stick to a dollar-to-dollar match in the next round of negotiations. "Politics-wise, this was the moment of maximum leverage, not the debt ceiling talks. If you are trying to get $1.6t total, getting less than half now--when the most factors are on your side--seems to severely hurt your chances," said the Senate staffer.

The complaints frustrate White House officials. They argue that Senate Democrats are one reason they don't have as much leverage on taxes as they'd like. The bill that Senate Democrats passed to let the Bush tax cuts lapse for income over $250,000 only lasted for a year. And even if it had been a 10-year bill, it only would've raised $700 billion. As the White House sees it, they're getting 85 percent or 90 percent of the revenue from that bill plus unemployment insurance plus the stimulus tax credits plus the business extenders. And their bill is permanent, and it might actually be able to pass the House.

Assuming the details of this deal remains fairly similar to what I've outlined here, the question of whether the White House outfoxed the Republicans or capitulated too early won't be answerable until we know the outlines of the next deal. If the White House is able to pocket this revenue and then extract a 1:1 match, or something close to it, for any further spending cuts, administration officials are liable to end up looking quite smart. But if, as Republicans believe and some Democrats fear, the White House folds when confronted with the debt ceiling and agrees to big entitlement cuts in return for few or no revenues, this deal will be seen as the moment when the White House blinked and traded away the guaranteed revenue of the fiscal cliff for a lowball offer from the GOP.

Related: Why Republicans think they're winning the fiscal cliff.

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Ezra Klein · December 31, 2012