Obama's Fiscal Politics: Snatching Defeat out of the Jaws of Victory

When it comes to the fiscal cliff, the president is in a superb tactical position. Why is he making concessions before he has to?

President Obama, to his great credit, has drawn a bright line. Taxes have to revert to the rates that were in effect before Bush tax cuts for the richest two percent.

This is crucial because the less the very rich pay, the more others have to pay either in the form of less tax relief for the bottom 98 percent or on program cuts like Social Security and Medicare.

Or has he drawn that line?

Obama's willingness to cede ground to the GOP is not only "dubious policy," writes Kuttner, it's also just plain "bad politics".

Yesterday, the White House put out the word that the president was willing to be "flexible" on the question of tax rates for the very top bracket. Specifically, that means the president will accept the Republican idea of getting some of the needed revenue by closing loopholes rather than increasing rates.

The leak of the softening of the Obama bargaining position was first reported by Erskine Bowles--why does he keep turning up like a bad penny?--after meetings with insiders at the White House, and confirmed by administration officials.

This stance is bad policy and dumb tactically on several grounds.

First, rates on the top two brackets are currently 33 percent on incomes between $250,000 and $388,000, and 36 percent on incomes above that level. On January 1, they revert to the rates that were in effect before the Bush tax cuts--36 percent and 39.4 percent, respectively. If Obama agrees not to raise rates on the very top bracket, he has to get the revenue somewhere else--or cut spending that much more.

The very richest people are the ones who have made out like bandits, even in the recession. They can surely afford to pay higher taxes. The Republican position is to get the revenue some other way--by closing loopholes. But the idea of capping deductions or closing other loopholes will hit a lot of upper-middle-class people, and leave the super-rich with less of a tax hike.

So this is dubious policy. It's also bad politics.

Obama has the Republicans in a superb tactical position. If Congress does nothing, rates rise January 1 for everyone. The Senate has already passed legislation keeping the current rates for the bottom 98 percent. All the Republican House has do to is concur, as Obama has requested. If they don't, taxes rise for everyone. Why blur that bright line?

The president's tough stance was working. Republican unity on the issue of no rate cuts for the rich was already beginning to crack.

Obama still has a novice's habit of softening his negotiating position going in, rather than holding possible concessions in his pocket for the final round. Republicans just take the concession as the new starting point, and don't concede anything in return. Where is his learning curve on this? Lyndon Johnson or Harry Truman would weep.

And it gets worse. The president softened his position at a meeting with corporate CEOs, who have formed the $60 million campaign called "Fix the Debt" to lobby for a deal that cuts Social Security, Medicare, and Medicaid but preserves as many of their tax breaks as possible. Every one of these people is in the top bracket.

They are posing as representatives of the public interest, but this is about self-interest.

If Obama is saved from his own impulses to cave in for the sake of splendid bipartisanship (and needlessly appeasing Wall Street), the thanks will be owed to the larger progressive community.

Meanwhile, the AFL-CIO, AFSCME, the SEIU, the NEA and other unions have been waging a Washington and grass-roots lobbying blitz to pin down Democratic members of the House and Senate to refuse to vote for any deal that fails to restore the higher rates on the top two percent or that cuts Social Security, Medicare, or Medicaid. Most Democrats in Congress are already firmer on these principles than their president.

If Obama is saved from his own impulses to cave in for the sake of splendid bipartisanship (and needlessly appeasing Wall Street), the thanks will be owed to the larger progressive community.

Obama has already embraced the very conservative notion that we need $4 trillion in deficit reduction over a decade. We don't. The best way to bring down the deficit is to restore strong economic growth and full employment, which increases revenue collections.

The dreaded fiscal cliff would cut the deficit next year by about $607 billion--that's such a big contraction that the Congressional Budget Office says it would push the economy back into recession. But if a one-year cut of $607 billion is so deflationary that it equals a fiscal cliff, what's a ten year cut of $4 trillion? It's a leap off a fiscal Everest?

The budget deal of 2011--the one that created the automatic sequesters--has already taken $1.7 trillion out of domestic spending over a decade. There is almost nothing left to cut on the spending side of the equation, except Social Security and Medicare--which are not the prime drivers of the current deficit and which do not belong in this debate at all.

As Obama points out in his moments of resolve, we just had an election to decide whether to raise taxes on the rich, or to cut Social Security and Medicare. He won. The party that would favor the wealthy and sock the middle class yet again lost.

As the bargaining gets serious, the president has a very strong hand. But he needs to play it a lot better than he has been doing.

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