Republicans in Congress find themselves caught between a rock and a hard place. As the President digs in on the issue of tax rates for the top 2% of earners the Republican Party seems to be imploding, unable to make decisions that are both necessary, and ultimately in their own interest.
I have predicted here that we ultimately would “go over” the so called fiscal cliff. I based that on my idea that Republicans would not be able to be able to vote for any increase in the top tax rates, and that inability would force us over the cliff. So far the Republicans are meeting expectations. Why should the Republicans agree with the President? Wouldn’t that just be giving in?
Republicans helped craft both the “sequester” as well as the “temporary” Bush tax cuts. The sequester is a big group of budget cuts, including defense, that was designed to be so “onerous” that neither party would fail to reach agreement through the so called “super committee” to come up with a deficit reduction plan. The Bush tax cuts were designed as temporary by Republicans who were attempting to reduce the impact to the deficit score put out by CBO. It was calculated and deliberate. With the sequester coming on line, and the Bush tax cuts going off line Republicans want to eliminate the sequester (or at least the Defense portion) and extend all the Bush tax cuts. So much for their stated desire for deficit reduction. With President Obama winning re-election the Republican strategy of hold and grab, giving nothing and refusing to deal on anything until the election, has effectively blown up in their face. So where do they go from here?
Due to the strategy of the Republicans own making the Bush tax rates are going to expire for the top 2% no matter what they do. The only question left is whether, in a fit of pique, or just because they are having a temper tantrum, the Republicans refuse to pass tax relief for the other 98% of Americans. Their options at this point are not great, and if they had any sanity left the facts on the ground would compel a deal. As they look back at the blown opportunity for a “grand bargain” with President Obama they must now realize what a mistake they made. That mistake was driven by the hard right in the House Republican caucus, and led by Eric Cantor. Leaving aside the substance of the tax issue the political reality is that Cantor and the Republican caucus rolled the dice and came up empty, but now want a redo. The President is not having any of it. Republicans can drive us off the cliff, but the rates for the top 2% will still be 39.6%. And they will pay a heavy political price for having done so.
So the Speaker is stuck with some of the same circular firing squad members as he had before, and his help from outside the House is not what I would call assistance from friends. Speaker Boehner has offered $800 billion in revenues as part of his proposal, but claims you can get that number from “closing loopholes”. But he fails to identify which loopholes would produce the revenues. He also fails to take into account how such loophole closings might impact potential tax reform in the next Congress. All iterations of tax reform seem to rely on reducing or eliminating loopholes, and producing a simpler rate structure. Boehner’s plan would grab some of those now for simple revenue production, just to stop a relatively small increase in the tax rate for the top 2%. Unless reality sets in the Speaker is going to end up with egg on his face again. So what is a surrounded Speaker to do?
The Speaker first needs to determine that he will allow forward a bill that does not have a “majority of the majority”. If he refuses to move a compromise forward on that basis the odds are we go over that cliff. What might that compromise look like? I believe that the Speaker, being a realist and a deal cutter at heart, is willing to give on rates. But they do not have to be a replica of the Clinton era rates. The current threshold of $250,000 could be changed, with a smaller rate increase for that category, and new higher rates for higher thresholds. ($500,000 and $1 million?) Obviously the numbers have to work (the new revenue number will be reduced from the Presidential ask of $1.6 trillion down to between $1 and $1.2 trillion as part of the bargain). Once that part of the problem has been solved everything else will fall into place, with the possible exception of the debt ceiling. A new sequester will be devised for the bulk of the “entitlement” issue, which will essentially kick that can down the road to the next Congress. The President and Speaker could eliminate the defense sequester, but leave some portion of the non-defense sequester in place to satiate Republicans. The AMT patch could be enacted, and the two may trade off on the estate tax and capital gains tax, with a likely result being a hike in the capital gains rate in exchange for some level of continuation of current law on the estate tax. There does not seem to be a lot of support in Washington for an extension of the payroll tax cut, but that could be coupled with an extension of unemployment benefits that in some way has each side giving some. (Republicans give on unemployment but manage to get rid of the payroll tax cut).
Sounds pretty easy, eh? Maybe it is, for me. But the Speaker, if he agrees to what he must end up accepting anyway, will be put under a massive attack by that circular Republican firing squad. A deal that requires the Speaker to rely on Democratic House votes to pass is packed with political peril for John Boehner personally. But a deal that requires Republican majority support will be substantially harder to find. The Speaker is trying to gain control of his caucus, and he got Eric Cantor, Paul Ryan, and Kevin McCarthy to sign on to the $800 billion revenue offer. Can he get those three to sign on to rate increases? Doubtful at best.
For those looking for the betting line: Over the cliff is still a favorite, although the odds have been reduced in favor of a deal. The President’s weekly address is below.