No Deal

The narrative being told right now in the media is strange: Boehner and Obama must compromise and find common ground for the good of the American people. Or so I’m told. I’m always a bit incredulous when I hear this storyline repeated. Consider the situation in the simplest of terms: Obama/Democrats want some cuts and some revenues through tax increases for the rich, and Boehner/Romney/Republicans refuse to raise any revenue to help solve a deficit problem. This is a binary outcome, so I’m not sure there’s that much room for compromise. You either get more revenue, or you don’t. In fact, much of the criticism of Obama from the left during the summer of 2011 was that Obama’s position of $1 in revenue for every $3 in cuts was already a position of severe compromise that many in his own party were not comfortable with. Based on a recent document obtained by Bob Woodward of the Washington Post, I’d say it’s absolutely true, he was willing to give up way too much. I’m actually astounded by the number of programs for the vulnerable he was willing to cut. It was completely antithetical to what the people who elected him wanted protected. And Boehner still wouldn’t take the deal.

The Republican position seems to have moderated, ever so slightly. Previously, their position was one of no new revenue. Recall the infamous Republican debate where no candidate, including Romney, would take a deal that gave $1 in tax increases for every $10 in spending cuts.

Here is Boehner with Diane Sawyer last week following the election:

I made clear yesterday, that raising tax rates is unacceptable, and frankly, it couldn’t even pass the House. (coughs) I’m not sure it could pass the Senate. So the votes aren’t there. What I did yesterday was lay out a reasonable, responsible way forward to avoid the fiscal cliff, and that’s through putting increased revenues on the table, but through reforming our tax code, and I would do that if the President were serious about solving our spending problem and trying to secure our entitlement programs.” [Bold for emphasis].

And so, there is the so-called “fiscal cliff”, in which all of the Bush tax cuts at every income level will revert back to the higher rates of the 1990s, along with cuts in defense spending. That is, if no deal is reached before the start of 2013.

This is ultimately a game of chicken. Obama has the upper hand, given that in virtually every campaign stop and debate, he repeated his plan to increase taxes on the well-to-do. Oh, and he ended up winning the election. Boehner probably knows that, but maybe he thinks fear of the fiscal cliff and a recession will force Obama to cave. Obama can simply repeat the strategy from early 2012, where the extension of the payroll tax cuts was on the table. Republicans refused to deal without corresponding cuts, and they ultimately caved and received the bulk of the blame for not getting something done faster. Or, by letting the fiscal cliff happen first, and letting all tax rates increase, Obama could then pass middle-class tax cuts. Technically, Boehner will not have raised taxes; the Bush tax cuts simply expired on their own, and he then helped pass a middle-class tax cut. Perhaps this would be a way of saving face before someone like Grover Norquist.

The fiscal cliff happening is preferable to the grand bargain that Obama proposed in 2011. So as a liberal, I would rather see this come to pass, with tax rates rising on me and everyone else, rather than cuts in spending and programs on the most vulnerable.

Ultimately, something probably will get done. What should a deal look like? It should look nothing like the grand bargain of 2011. There shouldn’t be $1 in revenue for every $3 in cuts.

Obama should have several demands for revenue in whatever deal that gets passed. Preferential treatment of capital gains and the carried interest deduction should be removed. According to the CBO, these account for 0.5% of GDP.

For those making over $250,000, there can be a strict limit on the number of deductions they can use to ensure they do not pay an effective rate far below what they “should” be paying. This can be similar to what Romney proposed in his campaign. Only, you know, without the massive cuts in tax rates for the rich.

Letting the high-income tax rate revert back to 39% would also gain about $42 billion in revenues in 2013 alone.

There should be work done on gradually limiting the tax exclusion of employer-sponsored health insurance benefits. This is the single greatest tax expenditure, and it costs the Treasury $240 billion a year. The Affordable Care Act has made some progress in this area, but a deal could build on those gains. This is important since this tax exclusion can lead to over-use of health services, which ultimately contributes to the problem of rising health care costs.

There can also be gradual limits or caps in terms of the mortgage interest deduction for people of all income levels.

There also have to be cuts in defense spending.

These are the items that can and must go in a new grand bargain. Social Security should have only minor touches, if it is included at all. Neither Social Security nor Medicare should increase the age of eligibility to receive benefits. The low-income, blue-collar individuals who need those programs the most have not really experienced the increase in life expectancy that those in upper-income brackets have had.

It would be great if Obama sticks to these demands and does not cave. I’m hopeful, as his strategy has changed significantly since the “grand bargain” failed in the summer 2011. However, looking at the memo Bob Woodward unearthed, I can’t help but worry.  I’m reminded that civic duty is less about voting on election day and more about holding the person elected accountable every single day. To give them a friendly reminder of who they are representing.

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