Everybody Better Sober Up

The Democrats have won a smashing victory this past cycle, and with that victory will come great expectations. Naturally there are a whole host of issues that many Democrats feel have been neglected for the past four years, and they will be looking for action. I have a funny feeling that there is going to be some level of disappointment with the results.

The first flash point is the most obvious one, the fiscal cliff. But the cliff is an amalgamation of a whole bunch of separate issues that have managed to converge on us at the same time. The cliff debate has been publicly focused on “revenues”, with the President laying down a marker of a ten year revenue number of $1.6 trillion, and Republicans generically appearing open to some “revenue” through loophole closings. On this matter Democrats and the President hold all the cards, as no action means the rates for everyone go up on January 1. But despite all the focus being on that issue, and only that issue, there is substantially more to be determined. The sequester cuts need to be unwound, with Republicans very concerned about the Defense cuts, but Democrats will be looking to avoid some of the non-defense cuts as well. And for those who believe that the debt ceiling is not part of this mix they better think again. It is a point of leverage for the House, as they will need to vote for any increase. The President will be looking for a larger deficit reduction deal that will have to include the debt ceiling being raised as a part of that package. I can assure you, election or not, that Speaker Boehner will not just be giving up that chip easily.

What else, besides the Bush tax cuts, are at stake? Plenty. Start with the AMT Patch. The Alternative Minimum Tax (AMT) was originally designed to stop top earners from shielding most, or all, of their income with legal federal deductions. As it began to ensnare more people, including middle class taxpayers, Congress has enacted “patches” that protect these folks. What type of numbers are we talking about? Currently about 4 million taxpayers are hit with the AMT. With no “patch” for 2012 that number will climb to 30 million, and would likely hit 40 million within a year or so. Want to give away that new found Democratic majority? Ignore that at your peril.

Treatment of Capital Gains and dividend income will change dramatically. While there is a major impetus for fairer (read: higher) taxes on capital gains and dividends the simple expiration of existing law certainly is not the best way to achieve that. This is a major bargaining chip for the President, but it makes the negotiations with the Republicans a bit more complicated.

So you have major spending cuts, including defense, tax rate increases, AMT Patches, and deficit reduction, including some “entitlement reform”, along with the debt ceiling issue, all rolled into one. And you have some Democrats thinking that the President is just going to snap his fingers and get a package that is 100% satisfactory to Democrats. For people that hold that view disappointment lies right around the corner.

Beyond the fiscal cliff there are of course other priorities that have been neglected. Unions looking for card check? Don’t think you are going to be getting that through the Republican House. Tax reform that further hits business? No chance. Carbon tax? Unless it is part of the fiscal cliff deal you have zero chance of getting it through the House. And to be honest it just will not sell with Republicans, even as part of the fiscal cliff deal.

So I am the skunk at the garden party! Do I see the glass as being half full for any Democratic initiatives? I think that areas where the President can act through his executive authority will bring progress on a host of issues. Legislatively the timing has never been better for comprehensive immigration reform, which will be able to garner Republican votes in the House. Judicial nominations? A big win for Democrats, as the President will be able to nominate judges that will protect and preserve important rights, and will likely share his values over new challenges, including Republican efforts to impose new hurdles on voting rights. In the final analysis, despite the fact that the fiscal deal will ultimately contain items of distaste to Democrats, the issue of the extension of the Bush tax cuts for upper income folks is settled. In favor of the President.

I believe that in his heart of hearts the President is fed up with the constant stream of Republican attacks. As a political matter, no matter how distasteful, we can understand the campaign attacks. But to have the McCain/Graham cabal launch these continuing and bitter attacks on Ambassador Rice after the election leaves the President no alternative but to get tough. And I do not believe, despite his big victory, that he was looking to do that at this point. Bad will begets bad will, and it is a rough way to start the post election interactions between the parties. But that slight dose of bad will will make it that much harder to achieve a common sense compromise on the critical fiscal matters facing the country, and more likely that we will have to go over the cliff before we can reach agreement. I hope I am wrong, but right now it looks like more than a few people in Washington better sober up, and Democrats should be prepared to give the President the room he needs to make the best deal he can.

My earlier post here.

http://live.wsj.com/public/page/embed-EE994540_68DA_4374_81FE_287A76422E5C.html

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