Budget talks between President Obama and Speaker Boehner fell apart yesterday after the Speaker called the President and said he would instead negotiate directly with Senate Leaders Reid & McConnell.

The President spoke to the press within the hour to begin framing the collapse of the negotiations. He reinforced his theme that he was the reasonable, flexible party willing to compromise to get a deal.

I just got a call about a half hour ago from Speaker Boehner who indicated that he was going to be walking away from the negotiations …

… And so the question is, what can you say yes to? Now, if their only answer is what they’ve presented, … — if that’s their only answer, then it’s going to be pretty difficult for us to figure out where to go. Because the fact of the matter is that’s what the American people are looking for, is some compromise, some willingness to put partisanship aside, some willingness to ignore talk radio or ignore activists in our respective bases, and do the right thing.

And to their credit, Nancy Pelosi, Harry Reid, the Democratic leadership, they sure did not like the plan that we are proposing to Boehner, but they were at least willing to engage in a conversation because they understood how important it is for us to actually solve this problem. And so far I have not seen the capacity of the House Republicans in particular to make those tough decisions.

The President positioned himself as the aggrieved party, trying to understand what went wrong:

It is hard to understand why Speaker Boehner would walk away from this kind of deal.

I actually think it’s quite easy. The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded.

Today’s press stories treat this as a detail. It is instead the key to understanding why the talks fell apart.

Here are some primary source materials for reference:

Recent history of the negotiations

First we’ll look at total levels of taxation.

This gets a little tricky, because Republicans and Democrats frame tax numbers differently. These negotiations assumed a gap between current law taxation and current policy taxation of $3.5 T over 10 years.

  • Last weekend the White House was willing to, from their perspective, reduce revenue at least $2.8 T relative to current law. That’s about $700 B higher revenues than current policy. That number would be a ceiling for revenues.
  • Tuesday the Gang of Six proposed their budget plan. The Gang’s plan would reduce revenues $1.5 T relative to current law, which (using these baselines) means $2 T higher revenues than current policy.  That means the Gang of Six proposed $1.3 T higher revenues than the President had been demanding privately. The Gang of Six includes three conservative Republican Senators.
  • After the Gang of Six offered their plan, the President backtracked from his position last weekend and increased his demand. Late this week the President was willing to reduce revenue by at most $2.4 T relative to current law. Using CBO’s numbers, that’s about $1.1 T higher revenues than current policy, and $400 B higher than last weekend. That number would be a floor for revenues.

Last week the President increased his tax demand by $400 B and changed a ceiling for revenues into a floor. (Technical note: My numbers are $100 B off from the $800 B and $1.2 T numbers publicly discussed. This doesn’t change the story and the backtrack amount is still $400 B.)

Next let’s look at tax rates. The President and the Speaker were negotiating certain parameters that would be agreed to for a future tax reform:

  • As of last weekend, the President was willing to support three individual tax rates, and the top rate would be less than 35 percent. Team Obama also agreed that the difference between the top individual and corporate rates would be limited.
  • After the Gang of Six released their plan, the President’s team backed away from this position.
  • In addition, Team Obama suddenly insisted that refundable tax outlays (for the poor) not be reduced by tax reform.

Again, the President retreated from an earlier position on taxes as a result of the Gang of Six introducing their plan. On total tax revenues, tax rates, and refundable outlays, the President increased his demands last week.

The Speaker’s statement today reinforces this description of recent history:

The discussions we’ve had broke down for two reasons.  First, they insisted on raising taxes.  We had an agreement on a revenue number – a revenue number that we thought we could reach based on a flatter tax code with lower rates and a broader base that would produce more economic growth, more employees and more taxpayers, and a tax system that was more efficient in collecting the taxes that were due the federal government.  Let me just say that the White House moved the goalposts.  There was an agreement, until the President demanded $400 billion more, which was going to be nothing more than a tax increase on the American people.  I can tell you Leader Cantor and I were very disappointed in this call for higher revenue.  Second, they refused to get serious about cutting spending, and making the tough choices that are facing our country on entitlement reform.  Listen, that’s the bottom line.

The President’s statement does not explicitly confirm that the President “moved the goalposts,” but is consistent with it, and he cited the Gang of Six four times, wrapping his arms around their position.

In addition, what we sought was revenues that were actually less than what the Gang of Six signed off on.  So you had a bipartisan group of senators, including Republicans who are in leadership in the Senate, calling for what effectively was about $2 trillion above the Republican baseline that they’ve been working off of.  What we said was give us $1.2 trillion in additional revenues.

Press reports today say Presidential advisors confirmed that the President increased his demand for more revenues last week.

In addition, the President and the Speaker had open disputes about how much to save from Medicaid, and about an automatic mechanism to force Congress to act on the entitlement and tax provisions. The President wanted a provision that would “decouple” tax rates if Congress failed to act, allowing top tax rates to increase while extending the other tax rates. Republicans would hate this outcome and would therefore have an incentive to legislate the deal. The Speaker insisted that if this automatic hammer decoupled tax rates, it also had to repeal the individual mandate from the Affordable Care Act (ObamaCare), to create roughly equal legislative pressure on both sides of the aisle.

Negotiation tactics, framing & strategy

While it is an aggressive tactic, there is nothing “wrong” with moving backward in a negotiation. It is likely to anger the counterparty, and it usually reduces the chance of getting a deal. But sometimes conditions change, as they did this week, and one party feels his position is strengthened and thinks he can demand more.

That appears to be the case here. The three conservative Republican Senators who supported a high level of taxes changed the President’s perception of what he could demand on taxes, and especially what he could publicly defend as reasonable if negotiations fell apart. So he backtracked and increased his demand.

At the same time, this has important consequences for those trying to understand why negotiations fell apart.

  • It shows the President was willing to risk not getting a deal for what he perceived as an improved chance of getting better than his bottom line on taxes. The President’s increased private demands on taxes contradict his public claim that he has been doing everything possible to get a deal.
  • The President said, “It is hard to understand why Speaker Boehner would walk away from this deal.” No it’s not. The deal the President offered him got worse over the course of the past week.
  • Imagine the Republican reaction if word had leaked out that the Speaker and Leader Cantor had agreed to a worse tax position than the President had offered them one week prior. There is no way they could take that risk, and the President had to know that.  The President made a new demand he had to know Republican Leaders could not possibly accept. The President toughened his position knowing it would cause the talks to fall apart, yet feeling comfortable that he had a stronger rhetorical position explaining the collapse.
  • The Gang of Six’s efforts have been characterized by some as a shining example of bipartisanship that showed a path forward toward a budget compromise. But because the Gang’s plan was left of the President on taxes, the President backtracked and caused negotiations to collapse. The Gang of Six’s substance and timing helped kill whatever remaining short-term chance there was for a big budget deal.

President Obama used the Gang of Six’s plan as an exit strategy. He backtracked on taxes, knowing this would force the Speaker to abandon negotiations, and knowing he could use the Republican Senators in the Gang to argue from a position of increased rhetorical strength in the ensuing debate. It’s a clever strategy but it belies the President’s public posture.

It seems the President’s own questions should be asked of him:

And so then the question becomes, where’s the leadership? Or, alternatively, how serious are you actually about debt and deficit reduction? Or do you simply want it as a campaign ploy going into the next election?

(photo credit: Luis Miguel Justino)