President Obama is prepared to veto legislation to block year-end tax hikes and spending cuts, collectively known as the “fiscal cliff,” unless Republicans bow to his demand to raise tax rates for the wealthy, administration officials said.
Freed from the political and economic constraints that have tied his hands in the past, Obama is ready to play hardball with Republicans, who have so far successfully resisted a deal to tame the debt that includes higher taxes, Obama’s allies say.
In the days after the November election, the tables will be turned: Taxes are scheduled to rise dramatically in January for people at all income levels, and Republicans will be unable to stop those automatic increases alone.
If he wins reelection, Obama may finally be able to dictate the terms of a bipartisan debt-reduction deal. And if he loses to Republican Mitt Romney, Obama could make sure that tax rates rise before he hands over the keys to the White House on Inauguration Day in late January.
Administration officials declined to say whether the veto threat will stand if Obama loses the election.
Obama has never explicitly said whether he is prepared to let the new year arrive without taking action to avoid the cliff. Some Republicans, noting that the president has backed off demands for higher taxes twice in the past, are skeptical that he will stand firm now. But his veto threat challenges Republicans to a dangerous game of chicken over a fiscal event that would raise taxes for nearly 90 percent of households, slice deeply into military and domestic budgets, and probably spark a brief recession.
House Speaker John A. Boehner (R-Ohio) and other Republican leaders are already complaining about the president’s “ ‘Thelma and Louise’ economic strategy.” (In the 1991 film, the lead characters drive off a cliff in a 1966 Thunderbird convertible rather than surrender to police.)
But Obama’s threat has concentrated their attention. If the president emerges victorious on Election Day, top GOP aides in both chambers say Republicans would press him to abandon his quest to raise the top rates, in exchange for a more meaningful prize — a long-sought agreement to stabilize the debt, in part with significant new tax revenue. Virtually all Republicans have long opposed higher taxes.
“That’s the solution to the Rubik’s Cube: The current president wants additional revenues. Republicans don’t want higher tax rates,” said Jonathan Traub of Deloitte Tax LLP, who served until earlier this year as a senior aide to House Ways and Means Committee Chairman Dave Camp (R-Mich.). Rewriting the tax code to increase tax collections without raising rates, Traub said, is “the only way to make the squares line up.”
Impediments to a deal are legion. Democrats pumped up on an Obama victory would resist compromise on the top rate, a point of partisan contention since it fell from 39.6 percent to 35 percent more than a decade ago as part of a package of tax cuts signed by President George W. Bush.
The Bush tax cuts, which decreased rates at all income levels, are set to expire Dec. 31. Obama and other Democrats want to extend them for income under $250,000 a year, maintaining the low rates for about 97 percent of taxpayers.
But Obama has been promising to eliminate the Bush tax cuts for the top 3 percent of households since the 2008 campaign, and liberals were furious with his decision to extend them in 2010.
Last week, Sen. Charles E. Schumer (D-N.Y.) planted a flag firmly for returning the top rate to 39.6 percent, arguing that Obama has made higher taxes for the rich a centerpiece of his reelection campaign and that polls show the public overwhelmingly supports the Democratic position.
“We have worked very hard to separate tax breaks for the rich from tax breaks for the middle class, on both ends of Pennsylvania Avenue,” said Schumer, the No. 3 Democrat in the Senate. “The fact that we’re winning on this issue is a sea change.”
Some Republicans — such as Sen. Jim DeMint (R-S.C.), a tea-party favorite — have conceded that an Obama election victory would amount to a mandate to raise the top rates. But Boehner recently ruled out that idea, and senior GOP aides say letting the top rate rise, even briefly, above 35 percent is a line party leaders cannot cross.
“The hard truth, which even the president’s advisers must know, is that raising those tax rates will have a major effect on small businesses and cost hundreds of thousands of jobs,” said Boehner spokesman Kevin Smith. “In this troubled economy, it’s hard to see how anyone in a post-election scenario could be for that.”
Still, Republicans acknowledge that Obama could emerge from the November election with a strong hand, and policy aides in both chambers are sorting through ideas for raising taxes on the rich without raising rates.
One option is revisiting the terms of a deal Obama discussed with Boehner and House Majority Leader Eric Cantor (R-Va.) during last year’s battle over the federal debt limit. At that time, Republicans offered to generate $800 billion in fresh cash for the government over the next decade through an overhaul of the tax code and Obama agreed to push the top rate below 35 percent.
But Democrats say they would want far more than $800 billion if Obama wins. Even if the parties could agree on a revenue number, no one believes lawmakers could rewrite the code before hitting the cliff in January. So the tax-writing committees would have to do the rewrite next year, leaving the issue of where to set the top rate in 2013 as one of the thorniest barriers to a deal.
Policy analysts in both parties are focused on the question of 2013, and have come up with an array of ideas for extracting about $55 billion from wealthy taxpayers next year while keeping the top rate at 35 percent. Among the ideas under discussion: a temporary surtax on millionaires along the lines of what Obama has called the “Buffet rule,” and a temporary cap on the value of deductions and other tax breaks claimed by top earners, an idea backed by Obama and endorsed by Romney for taxpayers at all income levels.
Top Republicans say they may also be willing to sweeten the year-end pot by throwing an increase in the debt ceiling into the mix. The nation is due to hit the $16.4 trillion borrowing limit in the spring, and lifting it this year would avoid a repeat of the ugly battle that dominated Washington a year ago and threatened to rock world financial markets.
Strategists on Capitol Hill are also gaming out a Romney victory, which could prove complicated as well. Romney has called for legislation to maintain the Bush tax rates for people at all income levels through 2013 to give the new administration time to craft its own tax and spending plans.
The House has already passed such legislation, as well as a bill to replace scheduled Pentagon cuts with cuts to food stamps and other social programs. If Obama continued during the lame-duck session of Congress to block those measures, with or without the help of Senate Democrats, Republicans could simply revive them in January, after Romney takes office.
But undoing the tax increases after the fact could prove difficult. GOP tax aides note that, once tax rates rise, any move to lower them again would increase the budget deficit, creating procedural as well as political problems.
Even if Republicans take control of the Senate, they have little hope of winning a 60-vote majority. And they would be unable to use a fast-track procedure known as reconciliation to protect a deficit-raising tax bill from a Democratic filibuster.