There seems to be an assumption that with the fiscal cliff debate, President Barack Obama has the upper hand and that Republicans are under pressure to cave to the president’s demands for $250K-plus, or $400K-plus tax hikes and virtually no spending cuts. I disagree with that assessment. I think the pressure is on President Obama, who is locked into a situation with no result that will be favorable to his political fortunes.
First, the bravado about the president letting the deadline pass and blaming Republicans for the tax hikes, sharp cuts and ensuing recession is fantasy thinking. The GOP may be blamed for a little while by administration acolytes in the Washington media, but over time the president, as always, will take the lion’s share of the blame for the adverse economy. It’s his economy.
Second, there’s a reason Obama only wants lots of tax increases and little cuts. For him to agree to any changes in Medicare or Social Security, such as an age eligibility change, or a reduction of benefits based on income, would be construed as a betrayal of his liberal base who stuck by him through tough economic times and the re-election. Consider the consequences: Here’s President Obama, who spent hundred of millions of dollars telling folks that Mitt Romney wanted to reduce their entitlements, actually doing that in the fiscal cliff negotiations. His support among the Democratic Party base would crater into indifference.
House Speaker John Boehner has a weak alternate plan out there that would protect Americans earning fewer than $1 million from tax increases. That’s it, and the fiscal cliff negotiations are pushed out to the future. It’s a pretty crappy deal, but Obama may be forced to accept it, with perhaps a face-saving reduction to $800,000 or so. The president simply has too much to lose if the very slow economic recovery ends and the recession resumes.
The best solution is no income tax cuts, but hundreds of billions of dollars in new tax revenue through tax reform, similar to 1986. Deductions could be considerably tightened and loopholes ferreted out and closed. That could be accompanied by a modest stimulus bill and the tepid spending cuts the president has proffered. But that would also anger the president’s base, which has been told repeatedly the past two years that those earning more than $250,000 a year must be taxed higher.