The White House and Dems are taking heavy criticism this morning for giving more ground towards Republicans in the fiscal cliff talks. Dems have offered to raise the income threshold to $450,000 and to keep the estate tax threshold at $5 million, in exchange for an increase in unemployment benefits but no additional stimulus spending. This is being widely denounced on Twitter and elsewhere as squandering Dem leverage.
The view of the situation taken by White House and Dem negotiators, however, is at least worth thinking about.
A White House ally spells out an alternative interpretation. Dems don’t necessarily believe going over the cliff will give them all that much more leverage in the talks next year. It’s been widely argued (by me and many others) that if we do go over the cliff, Dems can simply move to pass the Obama Tax Cuts For The Middle Class, forcing House Republicans to go along. But some Dems question whether House Republicans will feel the need to follow this script. Rather, the thinking goes, if Dems do that next year, the House GOP leadership can pass its own bill cutting taxes on all income up to, say, $500,000 or $600,000.
If the idea is that it’s easier for Republicans to support continuing tax cuts just on some income levels after they’ve all expired, such a bill (with $500,000 or $600,000 as the threshold) could pass the House. What’s more, some Congressional Democrats may feel like they have to support such a bill, too. And the worry is that if this is then kicked over to the Senate, then some Senate Dems may feel tempted to support it or at least negotiate around it, which could divide Senate Dems. After all, some of them have already voiced support for putting the income threshold at $500,000 or $1 million.
And so, the idea is that it’s better to lock in a deal on rates now, at, say, $450,000, extend unemployment benefits, and pocket those gains and continue the fight next year. Raising the income threshold is obviously not desirable, but Dems will have broken the decades-long GOP opposition to raising tax rates on the rich, pocketed hundreds of billions in revenues, made the tax code more progressive, and extended unemployment benefits — all without agreeing to any spending cuts yet.
In so doing, will Dems squander their leverage next year? I and others have argued that they would. But the alternate interpretation is that Republicans, even next year, after a cliff dive, won’t have their options as limited as we might hope — they might not have to support the $250,000 threshold, after all. And Dems may still retain leverage in another way, even with the rates locked in by a deal this year. Republicans will use the debt ceiling to extract spending cuts, but Dems might counter by demanding more revenues via tax reform that closes loopholes and deductions for the wealthy.
I’m not endorsing the above reasoning; it seems to me we’ll never really know which course of action would have worked better, since one, and not the other, will have been followed. It’s still possible that the overriding motive for Obama here is simply to make a deal for its own sake. The skepticism among some Dems that Obama will make good on his vow not to negotiate over the debt ceiling is understandable. And on balance, I lean marginally towards going over the cliff, partly because it will set a better precedent for that fight — over the debt ceiling — by signaling that hostage taking will not be rewarded.
But it’s worth at least entertaining the possibility that the current posture the White House and Dems have adopted may be guided by an actual overarching strategy and game plan, and represents more than just a feckless cave, as many are suggesting.