Tax reform in the Senate
Senator Schumer recently said the Senate Democratic majority will pass a budget resolution, in part so it can create a reconciliation instruction to pass tax reform with a simple Senate majority. This is important.
I don’t begrudge the majority for creating that hardball procedural option – we Republicans did it in 2001 and 2003 to enact two rounds of tax cuts. In 2001 we used a reconciliation bill to pass a center-right bipartisan bill 58-33 (Democratic now-Chairman Baucus supported it). in 2003 we used it to pass a Republican-only bill 51-50.
Having a reconciliation vehicle creates the opportunity to pass a bill with a simple majority, but it does not require the bill to be partisan. If Senate Democrats follow this procedural path, they will have to choose between a bipartisan bill (likely Baucus-Hatch) or a partisan Democrat-only bill. The former would be easier to conference with a tax reform bill passed by a Republican House, while the latter would more closely hew to the policy goals of most Senate Democrats and our newly-avowed liberal/progressive President.
The way to tell which they’re going to do is to look at what the upcoming Democratic budget resolution requires tax reform do on total tax levels. If, as Senator Schumer suggests, the budget resolution requires that tax reform increase total taxes by hundreds of billions of dollars (or even a trillion+!) over the next decade, then reconciliation isn’t just an option, it’s their chosen path. Senate tax reform that massively raises taxes will be a partisan positioning exercise that will not lead to a law, and Senate Democrats will need to use reconciliation to block a Republican filibuster. If the President and Senate Democrats want to try to enact bipartisan tax reform, they’ll have to make it revenue-neutral or nearly so.
This didn’t have to be the case.
To my tremendous dismay, in 2011 and 2012 Congressional Republicans repeatedly signaled that they would agree to higher total revenues if they could get tax reform that they liked on microeconomic grounds (i.e., that lowers marginal effective rates on labor and capital). This created the risk that Republicans would agree to higher taxes once in exchange for tax reform, and a second time to get structural entitlement reforms. That’s a lot of potential tax increases, and it scared me tremendously.
While key Congressional Republicans insisted they would only agree to higher revenues resulting from dynamic economic growth effects, I was skeptical about the numbers. In the failed Grand Bargain negotiations of Summer 2011, Speaker Boehner was willing to agree to +$800B in taxes over ten years, as long as those increased revenues were the result of higher economic growth resulting from tax reform that lowered marginal rates. He, and later Republicans on the Super Committee, said they would not agree to “static” revenue increases but they floated the $800B number.
I think you can get maybe $100-150B in higher revenues over ten years from the pro-growth effects of a great tax reform bill. +$800B means you’re agreeing to static tax increases through reform as well. I think that’s terrible policy. You get the benefits of lower marginal rates and a somewhat more efficient economy, but you give them up by having government take more resources from the private sector. In my view that’s almost certainly not worth it, especially when you move from an imagined ideal tax reform to that likely to result from a real-world legislative process in which the efficiency benefits would be tremendously diluted.
The Grand Bargain fell apart in the summer of 2011 because President Obama wanted even higher taxes: +$1.2T over ten years. This discussion repeated itself last month, with the President even more aggressive in his demands for higher taxes. He got about half that amount with his New Year’s tax hike law.
Now the President is signaling that he wants the rest of his tax increases through tax reform, and there’s no way he’s going to get it. Senator Schumer’s comments suggest that Senate Democrats’ priority for tax reform is not making the code more efficient or increasing economic growth, it is raising total tax revenues to finance bigger government.
Agreement on the total level of taxation is a prerequisite for enacting tax reform. In 2011 or most of 2012 Democrats could have gotten some key Republicans to agree to +$800B, if it had been raised the right (pro-growth) way. Now they can’t get that. If Senate Democrats insist that tax reform raises total revenues by hundreds of billions of dollars, tax reform will go nowhere, for five reasons.
First, taxes were just increased by more than $600B. Those Republicans who were willing to support Speaker Boehner’s +$800B will count that +$600ish B against that amount. A few Republicans might in theory still be willing to agree to net revenue increases equal to the dynamic benefits of increased growth, but that’s at most +$100-150B. There is clearly no Republican appetite for net increases measured in hundreds of billions of dollars (this pleases me). Senate Republicans would block such a bill if they could, necessitating the reconciliation bill which could not be filibustered. But even if Senate Democrats pass it on a party-line vote, House Republicans will not agree to further tax increases beyond maybe +$100-150B, and then only if they really like the pro-growth incentives in a reform bill. They probably won’t even go above revenue-neutral because of reason #2.
Second, the President’s end zone dance and partisan taunting during and after the New Year’s tax increase law should convince even the most bipartisan and cooperative of Congressional Republicans that the political risk/reward tradeoff of working with the President on tax reform is poor. Bipartisan tax reform only has a chance if members of both parties can see both a potential policy win and a shared political win at the end of a long and winding road. President Obama has demonstrated repeatedly that he views fiscal politics as partisan and zero sum. For a Camp-Baucus-Hatch tax reform bill to come together, which is the only feasible path to enacting a new law, you need a legislative environment conducive to bipartisan cooperation. Thanks to the President’s framing of the last tax law we have exactly the opposite.
Third, a partisan path for Senate Democrats makes Finance Chairman Baucus’ job much harder. He will not have the bipartisan cover essential to repealing or reforming the popular broad-based tax preferences like the mortgage interest subsidy, the health tax exclusion, the deductibility of charitable contributions, and deductions for state and local taxes. If you want to move the policy needle you need to tackle these big items, and you can’t do that and succeed without bipartisanship to protect you from the political blowback of taking on such popular preferences.
Fourth, a partisan path means Mr. Baucus has a smaller universe of potential votes to work from. Sure he’d only need 50 (+ the VP), but corralling 50 of 55 votes on tax reform is hard and may be impossible. It’s much easier to try to find 50 votes out of 100, even if 20 conservatives of those 100 are practically ungettable. In committee any one of his 11 Democrats could hold a bill hostage if Republicans are unified in opposition.
Finally, tax reform that raises taxes creates far more losers than winners. That increases citizen and interest group opposition and makes it even harder to get the votes needed to pass a bill. Democrats may like the prospect of spending an extra trillion dollars but I’ll bet they can’t find the votes for the specific tax increases to raise that much, especially if they’re simultaneously trying to sell tax reform as helping taxpayers.
Senator Baucus knows all of this. Whatever his personal policy preferences, he has to know that a budget resolution that instructs him to enact tax reform that raises hundreds of billions in higher taxes will not lead to a law, but instead at best to a partisan stalemate in which he is the face of a liberal bill that represents the views of a quite liberal Senate Democratic caucus. It’s almost impossible for him to pass such a bill out of the Senate. If he does it’s almost impossible to conference with the House. And either way it won’t help his reelection prospects in low-tax Montana this election cycle.
If you are interested in the prospects for tax reform, watch the public postures of the key Senate Democratic players on total tax levels in the budget resolution. The people to watch are Finance Chairman Baucus, Budget Chairman Murray, and Leader Reid. Also watch Senators Durbin and Schumer and incoming Treasury Secretary Jack Lew if he is confirmed.
If in their budget resolution Senate Democrats require that tax reform raise total taxes by hundreds of billions of dollars or more, then tax reform will at best be an interesting contrast in partisan approaches between Senate Democrats and House Republicans, and at worst a partisan flame-out in which the Senate fails to pass a bill or doesn’t even try.
If instead the moderates (and Chairman Baucus?) force the budget resolution to create a reconciliation instruction for revenue-neutral tax reform, or tax reform that only raises revenues by $100-$150B over ten years from dynamic growth effects, then the prospects for significant and bipartisan tax reform in the next two years increase from “hopeless” to “extremely unlikely.”
Sorry to be so pessimistic.
(photo credit: Office of Senator Baucus)
A good first step that is already working
Tomorrow the House will vote on a short-term debt limit extension tied to a requirement that the House and Senate each pass a budget resolution. Donald Marron has written an excellent and succinct substantive analysis of the bill.
The House bill fits well with the strategy I advocated last week on this blog and in a Wall Street Journal op-ed. I hope the House passes it tomorrow.
My preferred policy is to “pay past bills and cut future spending.” This bill does the first part of that, for a short timeframe. In doing so, House Republicans demonstrate that they can govern as a responsible majority, and that they don’t want a default or even a cash crunch. No Member wants to have to vote to raise the debt limit, but it has to be done if the U.S. government is to avoid a further credit downgrade.
Simply by demonstrating that they are a governing majority that can pass a bill supporting a coherent strategy, House Republicans, with a strong assist from a few key Senate counterparts, have already won two small but important tactical victories.
- According to Senator Schumer, the Senate Democratic majority now plans to pass a budget resolution this year, their first in several years.
- The President has backed down from his demand for a long-term debt limit increase, as demonstrated by today’s Statement of Administration Policy.
These are not earth-shattering victories. They will not fundamentally change the course of our unsustainable fiscal policy. If we compare them to what needs to be done, they are trivial. But if we compare them to the Senate Democrats’ inaction for the past few years, and to the New Year’s tax increase rout of three weeks ago, these are important tactical victories, and the bill hasn’t even come to a vote yet.
Senate Budget Committee Ranking Member Jeff Sessions has for several weeks been urging that a debt limit extension be linked to a requirement that the Senate pass a budget, and he has been relentless in drawing attention to the Senate majority’s repeated failure to do the basic legislative work of fiscal policy.
While the short-term policy benefit of the Senate Democrats passing a budget is minimal, it should have an important clarifying effect on the broader fiscal policy debate. Senate Budget Committee Chair Patty Murray and Leader Reid will have their hands full because Democrats are far from united on these big questions that they must now answer.
- Do you support the President’s proposed level of taxes on top of the recently enacted tax increases?
- What is your policy on the appropriations sequester?
- Do you support any slowing of the growth of the major old-age entitlement programs?
- What deficits and debt do you propose for the next 5-10 years?
By forcing/encouraging/persuading Senate Democrats to do a budget resolution, this debt limit bill levels the playing field for future fiscal policy debates. House Republicans who have had to defend their proposed spending cuts will now be able to contrast those at-times painful policy choices with whatever alternatives Senate Democrats propose. This will clarify the fiscal policy choices and make the debate one that is simultaneously both more honest and less unfair to spending cutters.
President Obama endorsed this bill today because he had no other option. He knows that he cannot veto a short-term debt limit increase because he wants a longer one. Senate Democrats already agreed to do a budget resolution, and I’d bet Leader Reid told the President he didn’t want to stand in the way of the House bill if they passed it, as it now appears likely they will.
Even more important is the beginning of the return to regular order. For two years the President and Leader Reid allied to bypass the standard legislative process and instead force fiscal policy to be negotiated in ad hoc private talks between the President and Speaker Boehner. This bill looks likely to produce a regular order two-fer: the President is largely on the sidelines on the details of this bill, and the Senate Democratic majority appears headed toward reestablishing the normal budget process.
By setting the next debt limit deadline in mid-May, well after the sequester is triggered, the continuing resolution expires, and the budget resolution deadlines, this bill reorders the 2013 fiscal debates in a way that is advantageous to spending cutters. You want to have your strongest legislative levers up front, and if this bill becomes law they will be in the right order: sequester, then CR, with the weakest lever of debt limit last. That doesn’t mean that spending cutters will be able to force the President to fix everything, but at least they’re maximizing their leverage.
And if it works this time, as it appears likely it will, House Republicans can then repeat this tactic a few months from now. The challenge at that point will be coming up with and uniting around a similarly beneficial but modest fiscal policy change to attach to the next short-term increase. If conservatives want to pick a knockdown spending fight with the President, they’re better off doing that on the sequester and/or CR.
With four more years of a now-avowed liberal in the White House, I have extremely low expectations that America will soon shift to a responsible fiscal path. Spending restraint will be at best a piecemeal effort built over the course of countless small legislative struggles like this one. This bill is only the first step in a strategy to pay the bills and cut spending, but it’s a good first step.
(photo credit: Sean Dreilinger)
WSJ op-ed: How to Wage the Debt-Ceiling Fight
I have an op-ed in today’s Wall Street Journal: How to Wage the Debt-Ceiling Fight.
(photo credit: Mr. Soop)
Reactions to the President’s debt limit comments
I worked on debt limit bills from both ends of Pennsylvania Avenue, helping enact eight of them during my time as an aide to Senate Majority Leader Trent Lott and as an advisor to President Bush.
Here are a few reactions to the President’s debt limit comments in yesterday’s press conference.
- The President did not threaten to veto a debt limit bill. He substituted insults of Congressional Republicans for formal legislative threats. It’s easy to get distracted by the insults, but the absence of a formal threat is more important.
- This reinforces my view that the President views the debt limit as a must-pass bill, and that anyone in Congress who can attach other legislation to it has a good chance of it becoming law. The debt limit can only carry so much additional legislative weight, so the smart strategy is for House Republican leaders to attach something that is modest, closely related to deficits and debt, and difficult for Democrats to reject. Speaker Boehner and Senator Sessions both have good ideas that meet these criteria.
- Without a veto threat the President must rely on Leader Reid and Senate Democrats to water down or even remove spending cuts or other fiscal reforms that House Republicans may attach. In a strange way this is good for spending cutters, who should prefer to negotiate with Senate Democrats to negotiating with the President.
- The President is trying to frame the issue as “Me responsible, them reckless.” But setting aside the fringes of each party, this is not a debate about whether to increase the debt limit, but about for how long and how much spending should be cut at the same time. It is also a struggle for control of the legislative agenda for at least the next two years.
- The President is on weak ground when he tries to argue that a debt limit bill should be clean. He has signed four debt limit increases into law, only one of which was clean. The first was attached to the $800+ B stimulus bill, the second to a set of PAYGO reforms that Democrats supported and Republicans opposed, and the fourth was attached to the summer 2011 Budget Control Act that cut spending, set up the deficit reduction Super Committee, and created the sequester. Debt limit increases are often attached to fiscal policy legislation, and usually to bills that reduce the deficit. Kudos go to Major Garrett of CBS News for a tough question yesterday that highlighted this point.
- The President is also on weak ground when he argues that short-term debt limit increases are unusual or radical. Modern history includes both short-term and long-term extensions. President Obama signed a four-month extension, and the U.S. has spent more than seven of the last 30 years operating under extensions that lasted less than a year. The median increase in that timeframe lasted about four and a half months.
- He argues there is no good policy reason to do a small, short-term increase, but makes it clear that he does not expect to reach agreement with Congress on future spending cuts. In doing so he makes the clearest possible case for the benefit of small, short-term debt limit increases. That’s the only way spending-cutters in Congress will be able to keep unsustainable government spending front-and-center on the agenda. They should not expect to make tremendous progress in solving that issue with this President, but it’s better to revisit the issue a couple times a year, even unsuccessfully, than to return quietly to the unsustainable spending status quo.
- He is pretending to frame this as “be responsible and increase the debt limit now, and we’ll reduce the deficit later,” but by saying repeatedly only that he is willing to engage in a “vigorous debate” rather than to “negotiate” or “work toward a bipartisan solution,” he is signaling that he has no intention of compromising and no expectations for legislative success in enacting future deficit reduction. His strategy is to raise the debt limit now for as long as possible, then reject Republican demands to cut spending and move on to other issues. Usually a President says “vigorous debate” at the beginning of an election year. It is dispiriting but not surprising that he is saying it right after being reelected.
- He is afraid of getting jammed by small short-term debt limit increases (as I have recommended). Really afraid. This path would keep fiscal issues front-and-center when he wants to punt them, and it would force him to pay a price every few months. Just as in 2011 his top priority was to get a debt limit increase that lasted past the election so he would not have to negotiate again, his top priority is to make certain he isn’t forced to do this often. The primary leverage Congressional Republicans have on this bill is the size and duration of an increase, not the ability to deny any increase. The President will pay to do this infrequently.
(photo credit: White House video)
Payment prioritization and the debt limit
I’d like to explain why I think “payment prioritization” proposals are bad ideas, why and how Congressional Republicans should support a debt limit increase, and why they need to be smart about how they push for spending cuts.
Payment prioritization proposals
As background, in my last post I explained the difference between default and technical default:
Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.
I know of two different ideas for “payment prioritization” proposals. One is active, the other passive.
In the active proposal, Congress and the President would enact a law that explicitly prioritizes payments if Congress does not raise the debt limit. These legislative proposals always put debt payments first, an attempt to ensure that if Treasury must prioritize the use of its cash on hand, then there is no risk of the U.S. government defaulting on Treasuries. Instead, the Administration would have to delay paying other obligations of the U.S. government. These bills attempt to leave technical default as a threat while neutralizing the risk of default.
There are at least four problems with this idea.
- Credit rating agencies and investors may not be reassured because they may insufficiently distinguish between default and technical default. It’s easy to imagine a credit rating agency downgrading the U.S. for not paying contractors or States on time, even if principal and interest payments on U.S. Treasuries are all being made when they should be. The credit risk might be mitigated but it certainly wouldn’t be eliminated. If you make your credit card payments on time but miss your rent payment three months in a row you’re probably a bad credit risk.
- To the extent that the enactment of such a law increased the expectation of future legislative brinksmanship surrounding these non-debt obligations, such a law might actually increase credit risk.
- Even if Congress and the President agreed on such a concept in principle, good luck coming up with a short prioritization list to write into the bill. It would start small (debt repayment goes first). Then members would argue whether Social Security recipients, veterans, or active duty troops should be paid next. Maybe cancer research funding comes after those three, or is it money to protect against terrorist attacks? Congress is terrible at setting priorities; that’s a major source of the underlying fiscal problem.
- There is zero chance this proposal could be enacted while President Obama is in office. If the goal is to increase leverage of the spending cutters, what makes anyone think it will become law now?
Some conservatives argue for the passive variant of payment prioritization. Let’s vote against raising the debt limit, they argue. Let’s block any bill that increases the debt limit, they say. Treasury will soon run short of cash and have to make choices about where to spend. The pain caused throughout government will hurt liberals more than conservatives because they rely more on government than we do. This will therefore incent Democrats to agree to legislative spending cuts.
I agree that in such a scenario the Administration would place the top priority on repaying Treasury debt so that default is not a real threat. This is the kernel of truth on which the passive variant relies. It’s also why some on the right and the Obama Administration were both horribly wrong and misleading in the 2011 struggle when they argued about the increased risk of default (rather than of technical default) from that summer’s brinksmanship. Treasuries never have been and never will be at risk, because any Administration would use all available legal flexibility to avoid that increased credit risk.
But it’s irresponsible for the government not to fulfill in a timely fashion legal commitments it has already made. This is about the sanctity of contracts and the U.S. government’s credibility as a party to an agreement. If the U.S. government legally commits to paying someone a benefit, or agrees to pay a firm for a good or a service, the U.S. government should fulfill that agreement in a timely fashion. To do otherwise is taking the first step to becoming a banana republic. The fiscally responsible policy is to pay your bills on time and cut future spending commitments.
Also note that payment prioritization doesn’t stop payments, it just delays them. Then the aggrieved party sues the government, and probably wins, and it turns into a bloody mess.
Even if you disagree with me, and you think we need to take extreme measures to force President Obama to agree to spending cuts, and you’re willing to damage the U.S. government’s contracting credibility by starving it of cash by denying it the ability to borrow more, …
… what makes you think the President and his team are going to do so in a way that you like or that creates leverage for Congressional Republicans? Remember, he has the flexibility to decide which payments get delayed.
Today President Obama signaled what he would do in this situation. He will start warning politically powerful constituencies: seniors, veterans, and troops, that they are at risk of not being paid on time, and their Republican Congressman is responsible for it, and his or her phone number is 225-XXXX. I have no idea why some conservatives think it’s smart strategy to hand the President this kind of political club. In the extreme, he could in theory tell his budget director, “Delay payments for highway funds to any State that voted against me in the last election.” That’s absurd and egregious, but my point is that conservatives and Congressional Republicans are foolish in the extreme if they think that a passive payment prioritization strategy would create leverage on the President. It would do just the opposite.
Some then pivot back to the active variant as a solution, “Well, we’ll enact a law saying they can’t stiff troops or veterans or seniors, but the Administration is required to stick it to National Public Radio and welfare.” Okay, but how again do you plan to enact such a law? And we’re back where we started.
Neither active nor passive payment prioritization ideas would work to generate the leverage that spending cutters want. They also happen to be bad fiscal policy (violating contracts and really ugly cash flow management). These are the conservative parallels to the recently deceased trillion-dollar coin idea that was enchanting the left.
There are smarter ways to cut spending, and even to use a debt limit increase to cut spending. Here is one.
To cut spending, raise the debt limit
A better strategy for House Republicans to force some spending cuts on a President who doesn’t want them looks like this.
- Rely first on the sequester, second on the CR, and last on the debt limit as leverage.
- On the debt limit, state loudly and repeatedly a simple principle: We will pay our bills on time and we will cut future spending. Rather than being against a debt limit increase unless it also cuts spending, say that you’re for a debt limit increase that also cuts spending. You’re the legislative branch, you control what’s in the law. Act as leaders doing the right thing, rather than as rebels trying to block President Obama and Congressional Democratic spenders from doing the wrong thing. Agree with the President that we must pay our bills, and politely smile and say “And we’re going to cut spending, too.” Make him argue against cutting spending, rather than giving him the opportunity to attack you for risking financial disaster.
- Pass a bill out of the House that raises the debt limit and cuts spending. Make it a short-term extension, maybe 3-6 months, and cut spending by a similarly modest amount.
- Take whatever big spending cuts you want and make them conditions of extending the Continuing Resolution. Threaten to shut down the government rather than to make the government risk not paying its bills on time. It’s a less damaging and therefore more credible threat.
- Propose specific entitlement spending cuts to substitute for the sequester cuts you don’t like (presumably in defense). On this one sit and wait for Democratic nondefense appropriators to panic. You won’t have to wait long.
- Publicly state your willingness to agree to (and vote for) a longer-term debt limit increase as soon as the President is willing to cut spending a lot or at least to commit to a credible long-term fiscal path. If he won’t, state that you will repeat step 3 as often as needed.
- If the President threatens to veto your short-term debt limit increase + spending cuts, then tell him you’ll allow House Democrats to pass a clean short-term debt limit extension, but they’ll all have to vote for it, every three months or so. Watch the ensuing panic in the House Democratic caucus with amusement.
There are three key strategic premises upon which this strategy relies:
- Leverage to cut spending is best implemented through the sequester and CR more than through the debt limit.
- Leverage on the debt limit can be created only by being for the right kind of debt limit increase (short-term and with spending cuts), and not by threatening to block any increase. The more responsible policy path is also the one that generates more negotiating leverage, albeit in an incremental way.
- A smart debt limit strategy allows the President an opportunity to get his clean debt limit increase, but only for a short timeframe and only at great political cost to his own party in Congress. This is what creates leverage, not threatening to let the house burn down.
We will soon see whether Congressional Republicans can channel their oft-stated passion and commitment to cutting spending into a strategy that works.
(photo credit: Rod)
Definitions of fiscal deadlines and consequences
There are some technical terms being thrown around indiscriminately in the press. This is a quick clarification so you know how to distinguish among them.
Three fiscal deadlines loom.
- The fiscal cliff law delayed the spending sequester so that it is now scheduled to cut spending beginning on March 1.
- The Continuing Resolution (CR) that substituted for all 12 regular appropriations bills expires on March 27th.
- Without an increase in the statutory debt limit, some time in late February or early March Treasury will face a cash crunch as it tries to meet all its obligations on time.
In addition,
- CBO will come out with their new baseline in late January.
- The President’s budget is due February 4 but it appears he’ll miss that deadline, maybe by a lot.
- The House and Senate should be marking up budget resolutions in March and considering them on the floor in late March.
If the first deadline (the sequester on March 1) passes without legislative action, across-the-board spending cuts will begin. Republicans generally like that as an aggregate fiscal policy matter, but they don’t like that defense is on the chopping block. No law means the sequester begins.
If the second deadline (CR expires on March 27) passes without legislative action on appropriations, major parts of the federal government will shut down. In those parts of government, only those employees who are essential to preventing loss of life or property (e.g., Coast Guard rescue personnel, air traffic controllers) can work. Other parts of the U.S. government close until and unless appropriations bills are enacted. This is typically called a government shutdown. Entitlement checks continue to be cut.
If the third deadlines (cash crunch after no debt limit increase) passes without legislative action, at some point Treasury will not have enough cash on hand to pay all of its obligations on time. The President must then choose whether to miss or delay debt payments to those holding Treasury debt, or instead to delay payments to others owed government funding, including Social Security beneficiaries, veterans, States owed payments for Medicaid and welfare and highways, and defense and other contractors for goods and services they provide to the federal government.
Missing or delaying a debt payment on Treasury debt is called default. Missing or delaying other government payments is sometimes called technical default or defaulting on our obligations. While default sounds like technical default, they’re quite different. The first directly threatens the full faith and credit of the U.S. government as a borrower and is a direct attack on our government’s credit rating and borrowing costs. The second is terribly irresponsible, and the government would be sued by whoever’s payments were delayed, but it’s a full step less egregious than defaulting on Treasuries.
When talking about the consequences of these deadlines I classify default as an order of magnitude more potentially damaging than either a government shutdown or a technical default. And while the sequester is painful to the policy goals of the areas being cut (national security, cancer research, border protection), from a fiscal policy perspective it’s cutting government spending and that’s a good thing.
It gets confusing because each of these could result in less money being spent by government, or at least less being spent right now. The sequester will cut spending by a fixed percentage across-the-board for a large portion of government (but far from all of it). If the CR expires without a new law, funding for a large part of the government will suddenly drop to zero. If there were a default
I hope this helps.
(photo credit: Tom Hynds)
A modest debt limit strategy
I agree with Speaker Boehner (in this excellent interview in today’s WSJ) that spending cutters’ principal legislative leverage comes from the March sequester and continuing resolution deadlines rather than from the upcoming need for a legislative debt limit increase. I disagree with those who argue that Congressional Republicans must therefore simply pass a clean debt limit increase as the President requests. I’d like to present an alternate debt limit strategy, one which is both responsible policy and potentially effective in making modest progress in cutting government spending.
My substantive view is that the debt limit must be legislatively increased. It is highly irresponsible to pursue a legislative strategy that places the full faith and credit of the U.S. government at risk. Failing to pay debt obligations is at least an order of magnitude more damaging than a “government shutdown” induced by failing to extend a continuing resolution. Having lived through the 1995 government shutdown, I wouldn’t want to wish that on anyone, but I’d happily risk another shutdown rather than roll the dice on the debt limit.
At the same time, despite President Obama’s jaw-dropping argument to the contrary, we have a government spending problem that must be addressed. If your teenager breaks the borrowing limit on a credit card you gave him, you don’t fix the problem by refusing to pay the bill. But you also don’t let him keep spending at such an irresponsible rate. You pay the prior obligations and you simultaneously force him to change his spending habits.
President Obama and his team are working overtime to frame a “clean” debt limit extension, without any accompanying spending cuts, as the responsible policy path. That is an outrageous argument. Look to Europe: Germany and its northern European neighbors repeatedly loan Greece enough cash to make it through the next few quarters and they require policy reforms as a condition of that loan. They then repeat the process frequently. Sure, Greece would like a large long-term loan with no conditions, but their creditors know that path would lead to no reform and ever-increasing debt.
The responsible policy path is to increase the debt limit and to cut government spending. It is not to increase the debt limit, with vague promises about maybe cutting spending in the future, if it is done the right way and only if it is accompanied by even more tax increases.
But if a debt limit must be enacted, if we cannot risk a default, then how can Republican spending cutters exert leverage on a President who doesn’t want to cut spending?
Most observers mistakenly assume that the only way to force the President to change his spending habits is to threaten to block a debt limit increase. But in addition to other, better levers like the impending spending sequester and the expiring continuing resolution, there are smaller levers that can change how a debt limit law is enacted without killing the necessary increase. These levers are not strong enough to force the President to accept a fundamental shift in spending trends, but they can be leveraged to enact significant incremental spending cuts.
There are three key tactical levers.
- All Members of Congress hate voting to increase the debt limit. It is one of the most politically painful votes a member can cast.
- Traditionally the majority party in each House delivers the bulk of the aye votes for a debt limit increase. The minority party free rides and most vote nay.
- When there’s a legislative disagreement over the size and duration of a debt limit increase, the smaller/shorter increase always wins.
It’s hard to overstate how much Members hate voting for a debt limit increase and how entitled House Democrats feel about not having any obligation to do so because they’re in the minority. That is the soft spot we’re going to exploit—catching the President between his policy goals and the political self-interest of his partisan allies, especially in the House.
I’ll propose this alternate strategy in the form of a hypothetical joint public statement by Speaker Boehner and Senate Minority Leader McConnell. The 50 vote number below can, of course, be dialed up or down.
Hypothetical press statement by Speaker Boehner and Leader McConnell
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blockquote>SIM-SPEAKER BOEHNER: I want to begin by assuring you that we will not allow the government to default on its obligations. The debt limit will be increased. The questions we must resolve are first, whether we will simultaneously cut government spending and second, who will cast the votes for the debt increase.
The President says he wants a clean debt limit increase without any accompanying spending cuts. I am prepared to bring such a bill to the floor and deliver 50 Republican votes for a three-month clean extension. If they wish to avoid spending cuts, the President and Leader Pelosi simply have to deliver the other 168 votes from House Democrats for a short-term clean extension. I will not block such a bill, and will even deliver up to 50 Republican votes needed to put it over the top. But if the President chooses this path, his party will have to deliver the overwhelming majority of the House votes, and he’ll get only a short-term extension. Then we’ll repeat this exercise three months from now and three months after that.
SIM-LEADER MCCONNELL: If the House were to pass such a bill, Senate Republicans would not filibuster it, but they also would not vote for it. It would have to pass the Senate entirely with Democratic votes.
SIM-SPEAKER BOEHNER: If the President and Democratic leaders want a longer extension than three months, or if they want more than 50 House Republicans and no Senate Republicans to vote aye (so they don’t have to twist as many Democratic arms to cast a very unpopular vote) then we need to cut government spending as well. If we match one dollar of spending cuts for each dollar of debt limit increase, then I’m prepared to deliver the bulk of the needed votes on the Republican side and do an increase that lasts up to a full year. Under this principle bigger spending cuts lead to a longer debt limit extension. Tomorrow the House majority will pass just such a bill, a responsible bill that both increases the debt limit and cuts government spending. We will pay our bills and we will take a significant step toward solving our underlying government spending problem. We Republicans see ourselves as representing the government’s creditors, the taxpayers who finance government spending. We will make sure the government does not default. But we’re not going to provide the votes for a long-term credit extension without reforms and regular checkpoints. If the President wants more borrowing without taking responsible action to cut spending, his party will have to deliver most of the votes in the House for such a bill, and they can explain to their constituents why they think we should keep borrowing without solving the underlying fiscal problem. And they can do this every three months for the foreseeable future. In the House we’d be willing to increase the debt limit for longer than a year if it is matched dollar-for-dollar with spending cuts, but only with a verifiable commitment from Senate Majority Leader Reid and Senate Budget Committee Chairman Murray that the Senate will pass a budget resolution this year and next. Repeating myself, the House will not allow the government to default. Tomorrow the House majority will pass a bill that raises the debt limit and cuts government spending. If the Senate instead raises the debt limit without cutting spending, then I will bring the bill to the House floor and deliver 50 Republican votes for it, as long as it’s not more than a three-month extension. If the Senate sends us a clean long-term extension, we’ll just send it right back to them. The President and his party have a choice. They can have clean short-term debt limit increases without spending cuts, passed every three months almost entirely by Congressional Democrats. Or they can have a longer-term debt limit increase simply by cutting government spending and passing budgets in the Senate. Either way, the President will get his debt limit increase, and the U.S. government will meet its financial obligations. But if he and his party are not going to cut spending, then they will have to carry the responsibility of unrestrained additional borrowing, and they will have to repeat this exercise every few months. It’s the President and his party’s call. The above strategy requires significant tactical and message coordination among House Republicans, possibly more than they are currently able to execute. But if they had such coordination they could create modest leverage on the debt limit bill while pursuing responsible policy. They could combine this with far greater leverage from threatening to kill a continuing resolution and to allow the spending sequester to bite. Rather than threatening enactment of a debt limit increase, this strategy attacks the President’s tactical political weakness. The President wants a debt limit increase, but his Democratic colleagues (especially in the House) expect they won’t have to vote for it. By turning this assumption on its head, this strategy would tell the President, “Hey, if you want your terrible policy, you’re going to have to deliver House Democratic votes for it. Good luck with that.” Either the President accepts and Republicans pound on the “Democratic debt limit increase” message every three months, or he agrees to cut spending. Either way, default risk is eliminated. Republicans will look responsible because they will be acting responsibly, and the markets couldn’t care less about which Members take political heat for casting these unpopular votes. But the Members care. A lot. (photo credit: Aaron Smith)
The venue shifts
A few days ago Speaker Boehner redirected his focus from negotiating an ad hoc Obama-Boehner deal to a more traditional legislative path. Since the Speaker announced plan B at the beginning of the week, the venue for substantive negotiations has shifted from Obama/Boehner to a standard House/Senate dynamic. If the House passes a plan B-like bill soon, I expect that redirection will be complete. This shift is a silver lining to a very dark cloud.
The venue shifts
This venue shift has three important effects.
- The venue shift narrows the negotiating scope. Spending cuts, a debt limit extension, and a CPI correction will be deferred until 2013 (notwithstanding Team Obama’s recent petulant claim that they won’t deal with it next year). The scope is now limited to tax changes, with unemployment insurance, a sequester delay, and a Medicare doc fix possible, more likely in separate legislation, but still done this year. Extension of the President’s payroll tax provision is less likely. His infrastructure spending never had a chance in the first place.
- The venue shift moves Senate Majority Leader Reid to the forefront of negotiations and moves the President back into a secondary if not a supporting role.
- The venue shift makes a legislative solution in 2012 more likely.
For weeks I have been struggling to see a substantive policy sweet spot in the Obama-Boehner negotiations that I thought could be supported by the President and the Speaker and could pass both the House and Senate. I am still skeptical that such a sweet spot exists, largely because I think the President won’t agree to big enough cuts in entitlement spending growth.
In contrast, it is easy to see a sweet spot between the plan B bill the House may soon pass, and S. 3412, which Senate Democrats passed last summer. I don’t know that this new regular order will lead to a solution, but at least there is a clearly visible path to success. The legislative process that begins with a plan B bill is, in effect, plan A. I don’t think there’s another path that has a better chance of successful resolution before year end.
We can see evidence of the venue shifting as Senate Democrats today debate amongst themselves about what their position should be on the House bill. No matter what definition of “rich” they choose, the news is that they are making their own decision, independent of that defined by the President.
Leader Reid enters the spotlight
Assuming the House passes a bill soon, all eyes should turn to Leader Reid. Be wary of his confident statements about what the Senate will and won’t pass. Nobody can possibly know this right now. Leader Reid can only know what he alone will or will not do. He can guess at his colleagues’ behavior, but when he asserts “The Senate will not pass X,” he is bluffing.
He can, however, unilaterally decide what bill the Senate will or will not consider. He can choose not to bring up a House-passed plan B bill, and he can choose not to try to send the Senate-passed bill from July to the House. He can unilaterally choose to have the Senate not act, but if he initiates the legislative process of considering a bill, then all bets are off.
Leader Reid’s challenge is that his standard tactic, not legislating and deferring to the President to negotiate with Republican leaders, is probably unsustainable if the House passes a plan B bill. Leader Reid’s key decision will be if and after the House has passed a bill. Will he sit and do nothing, in an attempt to try to force Speaker Boehner to resume negotiations with the President? Or will he move to proceed to a bill on the Senate floor? If he does the former, then Senator Reid is still acting as the President’s lieutenant, and is trying to keep the Senate in the background. If he begins to legislate, then he is acting as the Senate Majority Leader and he is taking the reins from the President.
The President’s struggle for relevance
As Leader Reid moves to the forefront, the President fades to the background. The driving question changes from “What policies does the President want?” to “What policies can we get enough votes for in the House and Senate?” Until now Congressional Democrats have been drafting behind the President. Speaker Boehner’s move forces Leader Reid to decide whether to continue following President Obama as he takes everyone off the cliff, or instead help Senate Democrats chart their own path to a new law, allowing the President to lead from behind.
I interpret everything I hear from the White House this week as part of a furious struggle to stay relevant. I think the President and his team were surprised by the Speaker’s move, and now they fear being sidelined. Yes, Dan Pfeiffer made a veto threat against the plan B bill yesterday, but the plan B bill will never make it to the President’s desk unchanged, so that veto threat is irrelevant. If it gets to the President’s desk, it will have been modified by negotiations with Senate Democrats, and that particular veto threat won’t apply.
The Obama-Boehner broader substantive talks are dead for 2012. I don’t think the Speaker could restart them even if he wanted to. He and his fellow Republican leaders have invested too much effort into getting House Republicans to support their new path. They can’t change direction again without risking a major revolt. It appears the President and his team either don’t recognize this or they don’t care. As long as Team Obama continues to talk about their failed bigger deal, and about the need to restart talks with the Speaker, they are not contributing to a speedy and successful legislative conclusion. They may, however, be instead investing now in publicly framing a future legislative failure.
Even if Leader Reid were to refuse to take up a House-passed bill, and even if President Obama were today to accept Speaker Boehner’s most recent offer on a bigger deal, there isn’t time to negotiate all the secondary and tertiary details, many of which are as difficult to negotiate as the top-tier stuff. The Obama-Boehner negotiating process has simply run out of time.
A secondary role for the President does not mean that he is irrelevant, or that he won’t become involved again late in the game. It means instead that he is, in effect, acting through Leader Reid. This limits his ability to influence the final product.
This looks to be a colossal negotiating foul-up on the President’s part. Did he never anticipate that the Speaker might go with regular order as the deadline approached and the President continued to play stall-ball?
The sweet spot
I think the following bill could pass the House and Senate before the end of the year.
- All tax rates below $700K of income are extended permanently as they are now.
- Above $700K, tax rates revert permanently to their pre-2001 rates: 39.6% for income and dividends, 20% for capital gains;
- the Personal Exemption Phaseout (PEP) and Pease limit on itemized deductions are not reinstated; and
- the AMT is permanently patched.
In addition, I think a separate bill or bills pass to:
- extend unemployment insurance in some form;
- patch the Medicare “doc fix” for another year; and
- delay or mitigate the spending sequester for 6-12 months.
In the current vernacular this is the Speaker’s plan B bill but with a $700K income threshold rather than $1M, plus separate bills on UI, doc fix, and the sequester.
I think such a bill would lose votes on both ends of the spectrum, and everyone would complain about something that should be in the bill but isn’t. But I think this bill could pass both houses.
And then, despite all of his current bluster, the President would sign it, in large part because a bunch of Democrats voted for it.
Off the cliff?
It is still quite possible that there will be no new law this year. The greatest threats at this point are House conservatives, Leader Reid, and the President. If we go off the cliff, it will likely be because one of three things happened:
- House Republican leaders couldn’t start the process by passing a bill with only Republican votes;
- After receiving a House-passed bill or bills, Leader Reid refused to initiate the legislative process; or
- President Obama failed to recognize the venue shift and said things to make legislative regular order harder, in a failed and futile attempt to restart the Obama-Boehner talks.
If President Obama were to stay quiet, and if Leader Reid were to bring up a soon-to-be House-passed bill, offer his own substitute amendment, and allow 3-5 relevant amendments per side, this thing would get done.
My prediction
- 50% chance the sweet spot or something quite close to it becomes law before the New Year begins;
- 48% chance there’s no new law;
- 1% chance I’m fundamentally wrong, the Obama-Boehner grand bargain talks restart, and a deal comes together before the New Year; and
- 1% chance the Mayans had it right, the world ends tomorrow, and we no longer care about the fiscal cliff.
(photo credit: Center for American Progress Action Fund)
What kind of negotiator is President Obama?
President Obama’s behavior over the past month is consistent with three different models, and I cannot figure out which one applies.
In model 1 the President is a risk-taker. He is a competent and effective negotiator who is willing to risk a recession and the ensuing political blame game in January because he thinks both will help him achieve his fiscal policy goals. I don’t think the President is willing to take such a risk, but Michael Barone makes a convincing case otherwise. You decide.
In model 1 the President has leverage because he is willing to go where Congressional Republicans are not (over the cliff).
In model 1 the President would, in the last few days of December, compare Speaker Boehner’s last offer with what the President thinks he can get after a few weeks of January blame game, then decide whether or not to accept the offer or take us over the cliff.
In model 2 the President is bluffing quite effectively. He is risk averse, and he is also a savvy, patient, and skilled negotiator. Privately he knows that he cannot allow a no-bill scenario because a recession would seriously damage his second term. But he has bluffed Congressional Republicans into thinking he is willing to take that risk, and this bluff has given him tremendous leverage. His initial offer was outrageous but designed for maximum press benefit over the next few weeks. He will demonstrate to a willingly gullible press corps that he is reasonable by showing the significant negotiating concessions he has made (from an absurd starting point) in an attempt to get a deal with those extreeeeme Republicans.
In model 2 the President continues to leverage Congressional Republicans’ fear of being blamed for no bill to press them for incremental concessions without giving up anything meaningful in exchange. Yet the President would, at the last minute, accept Speaker Boehner’s last offer, because the President is also quite afraid of a no-bill scenario. We would never know that he was bluffing since there would be an agreement and a bill.
In model 3 the President is an unskilled and ineffective negotiator who cannot or will not close a deal with those eeeevil Republicans. In this model the President does not want to go over the cliff, he is genuinely afraid of a recession, and he thinks he is a savvy and skilled negotiator who is bluffing Republicans. But he fails to understand what Speaker Boehner needs to support a final deal, or he doesn’t care and is unwilling to give it to him. Or he fails to realize how hard this kind of legislative deal is to pull together, and he mistakenly thinks he can sit with his arms folded until the last minute and then it will all suddenly, magically come together.
In model 3 President Obama doesn’t know how to compromise or isn’t capable of it. He knows only win and loss.
Model 3 could arise from overconfidence: “You are more afraid of no bill than I am, so you have to do whatever I say” (not recognizing that Republicans have a third option available).
Model 3 could arise from a sense of entitlement, “I won, the people voted for me and I campaigned on this, so I should get my way, and you must give it to me.” But Speaker Boehner is not negotiating for himself. He is an agent, negotiating on behalf of 240 House Members and 47 Senate Republicans, and he is therefore limited in his ability to agree to certain things. There may be no overlap between what President Obama feels he deserves and what Speaker Boehner can or is willing to deliver.
Or model 3 could arise from a zero-sum mentality, an inability to understand that an agreement requires both sides be able to label a deal as a win. We know the President is an effective political combatant and candidate, and we have seen him be ruthlessly attack those with whom he disagrees.
Unlike his predecessors, President Obama has not achieved any positive-sum legislative compromises with the other party. His only major deals with Republicans were the extension of all tax rates two years ago and the summer 2011 budget deal. The President now defines both of those laws as mistakes and losses rather than as honorable compromises. He sees and frames them as the results of zero-sum negotiations in which Republicans forced him to accept bad policy outcomes. And now when he has leverage, he thinks and hopes he can turn the tables, not recognizing that he still needs Speaker Boehner and House Republican votes.
President Reagan did Social Security and tax reform deals with Democrats. President Bush 41 did a budget deal and the Americans with Disabilities Act with Democrats. President Clinton did NATFA, and welfare reform, and a balanced budget with Republicans. President Bush did the 2001 tax cut, No Child Left Behind, Medicare, two energy bills, and TARP with Democrats. Each President defined these deals as success, as principled compromises, and both parties shared the credit.
President Obama has not negotiated a single win-win middle ground legislative compromise with the other political party. I fear he may not know how to do so or be unwilling to do so because he sees all his dealings with Congressional Republicans as pure zero-sum.
The scary part about model 3 is that the President might unwittingly kill an agreement, further inflame a nasty partisan blame game, and trigger a recession even though in this model that’s not the outcome he wants. In model 3 a different negotiator (say, Mr. Bowles) could find a middle ground that could pass both the House and Senate, but President Obama cannot or will not. Some combination of legislative inexperience, a distaste for interacting with Congress, and a naturally combative rather than cooperative temperament may hobble the President’s ability to close deals with those who have different policy priorities. And if model 3 is correct, in the next few weeks it could all go sideways because we have a President who doesn’t know how to or isn’t willing to negotiate.
It may be impossible for us to know which of these models applies to President Obama. I know this is an important question, and that a clear answer would not only allow us to analyze the current negotiation, but would increase the ability of other elected policymakers to deal effectively with the President over the next four years.
(photo credit: White House photo by Pete Souza)
A third option changes the negotiation
The conventional wisdom on the fiscal cliff is that there are two options: (1) an Obama-Boehner deal; or (2) no deal, in which case there is no legislation before the end of the year and we “go off the fiscal cliff.” Even those who acknowledge the possibility of other legislative paths appear to treat the Obama-Boehner negotiation as if it were the only alternative to a failure to legislate.
I won’t rehash my argument that the President is no more willing to risk a no deal scenario than Republicans, and therefore that he and his advisors are bluffing when they say they are willing to “go over the cliff” if a new bill is not to their liking. But after talking to Republican friends on Capitol Hill, I am confident that I have convinced no one of this point. It appears many key Republicans believe that a no-bill scenario is unacceptable and must be avoided at any cost.
If enough Republican Members of Congress believe this, and if the President knows they believe this, then Speaker Boehner has literally zero leverage in his negotiations. The President can dictate his terms because Republicans think he is willing to walk away from a bad deal and they are not.
At the same time many conservatives on and off Capitol Hill are talking about their policy views on what a possible Obama-Boehner deal should (or even “must”) include. I hear and read that marginal rates must not increase, or that we shouldn’t raise taxes by the $1.6 trillion the President demands, or that there must be a procedural path to enact tax reform, or that the defense sequester must be mitigated, or that a deal must include significant spending cuts and entitlement reforms. While I share these policy views, it seems absurd to be simultaneously making these demands of your negotiator while giving him no leverage.
If, however, there is a third option, one that is terrible but not inconceivable, then there is at least some minimum floor to the negotiations. If a third option exists, then Speaker Boehner and the Congressional Republicans he represents can reject demands from the President that are worse than that third alternative. Even a highly undesirable third legislative option changes the negotiating dynamic, if it is minimally tolerable in the extreme. If most Republicans would prefer that third option to a no-deal “go off the cliff” scenario, then the Speaker has at least a little leverage to reject or ignore outrageous demands from the President. He can say, “No thanks, Mr. President, we’ll just go with option C, whether you want us to or not.” The negotiating term for option C is a new and stronger BATNA: Best Alternative To a Negotiated Agreement. The risk of going over the fiscal cliff is irrelevant because Republicans have a backup plan if there is no deal with the President.
This doesn’t mean Republicans want to go with option C, or that they like option C. It instead means their negotiator now has the ability to walk away from a really terrible deal with the President, and that he can therefore demand a bit more from the President in exchange for cooperation on a deal. Option C is useful to Republicans even if their strong preference, for non-policy reasons, is to negotiate a deal with the President.
I think option C is S. 3412, a bill passed by the Senate in July. The short description is that this bill “extends the middle class tax relief for one year and allows tax cuts for the rich to expire.” More precisely, here is what the bill does (Joint Tax table is here):
- It extends for one year all current income tax rates for incomes <$200K (single) and <$250K (married);
- For one year it keeps the capital gains rate at 15% for the same incomes as above;
- For one year it (explicitly) raises the capital gains and dividends rates to 20% for incomes >$200K/$250K;
- It extends for one year other provisions of current law, important and not-so-important: marriage penalty relief and the child credit, education tax relief, and a handful of smaller provisions; and
- It patches the AMT for 2012.
There are corollary policy consequences to enacting S. 3412 as-is. Unlike the explicit capital gains and dividend rate increase on “the rich,” these consequences are implicit, meaning they would happen because S. 3412 didn’t prevent them from occurring.
- Income tax rates on incomes >$200K/$250K would increase to 36% and 39.6%, their pre-2000 rates;
- If no new legislation is enacted in 2013, we would again face the same kind of cliff at the end of tax year 2013 as we are facing now; and
- The spending sequesters would still happen beginning in January 2013, since S. 3412 is silent on the sequester.
On July 25th S. 3412 passed the Senate on a 51-48 near party line vote, in which Senators Lieberman and Webb joined all Republicans in voting no. This Senate vote is critical to my argument. Senate Democrats have already passed this bill, so it is rhetorically infeasible for them to now say no to it. If there is no Obama-Boehner deal, the Speaker has the ability to bring this bill to the House floor and present it as a take-it-or-go-off-the-cliff offer to Congressional Democrats. Many (most?) House Republicans would oppose it, but enough of them would join with Democrats to pass the bill and avert the cliff scenario.
S. 3412 is a terrible, horrible, no good, very bad bill. I hate S. 3412 because it allows taxes to increase by $80ish B (that’s a guess) next year. I hate that it raises revenues by increasing marginal rates rather than through tax reform-induced economic growth and by eliminating or scaling back tax deductions. I hate that it raises taxes on successful small business owners. I hate that it raises capital gains and dividend taxes. I hate that it creates more uncertainty and another cliff at the end of 2013. I hate that it doesn’t contain any spending cuts or entitlement reforms.
In addition I hate this bill because I helped enact, design, and defend the tax rates on income, capital gains, and dividends now in effect, first as an aide to Senate Majority Leader Trent Lott, and then as an aide to President Bush.
I detest S. 3412 and do not want it to become law. But I fear that Congressional Republicans are so afraid of being blamed for a no-bill scenario that they will agree to support a hypothetical Obama-Boehner deal that is even worse. They should not do that. They must not do that.
If you share my policy views but think the President is not bluffing, and if you think that America cannot, under any circumstances, risk a no-bill scenario, then S. 3412 is your Option C. It does exactly what President Obama has been calling on Congress to do, it allows tax rates to increase on the rich. It just doesn’t also do other things that we know he wants to do, but which he has not been making the centerpiece of his kick-Republicans-around PR campaign. S. 3412 does not raise taxes by $1.6 trillion, but instead by $80ish B (not counting the AMT patch). It does not guarantee the President $800B – $1T over the next decade, because it tees the fight up again a year from now when the political and legislative dynamics may be different. And it does not include the debt limit increase the President is demanding in end-of-year legislation, and which if enacted now would deny Republicans a tool to demand future spending cuts.
Even more importantly, S. 3412 has passed the Senate entirely with Democratic votes and is therefore a viable legislative alternative in an endgame take-it-or-leave-it scenario. Messrs. Boehner and McConnell could, later this month, announce, “Negotiations with the President have broken down because he refused to cut spending enough. We are therefore not going to stand in the way of S. 3412 becoming law. We oppose this bill and we will both vote no. We imagine most other Republicans will do the same. But it will be brought up for a House vote, and we expect enough House Republicans will join the Democrats in voting for this policy that we will avoid an end-of-year disaster. We will oppose President Obama’s tax increases, but we will not prevent them from becoming law because we do not want to risk a recession next year. The President will get his tax increases when Democrats
I hope this scenario does not occur, and I do not want to see S.3412 enacted into law, but having it as a viable legislative fallback helps the negotiating dynamic with the President. There is no reason why Republicans should feel pressured to accept any offer from President Obama that they deem to be worse than this bill, an $80ish B tax increase that extends for one year tax rates for only the “middle class.” Congressional Republicans have no need to fear the policy effects or political blame of the fiscal cliff because they have a less-worse alternative available.
Suppose, for instance, that in his private discussions with Speaker Boehner the President is characterizing himself as “coming down to $1.2 trillion” of higher taxes over the next decade (I’m guessing). S. 3412 contains a tax increase of less than one-tenth that size. Now it sets up between $800B and $1T of higher taxes over the next decade, if you guess that each subsequent year it would be extended again as-is. I hate temporary fiscal policy extensions almost as much as I hate S. 3412, but there is no reason why Congressional Republicans should feel obliged to support massive tax increases of more than this range in an Obama-Boehner deal. The extended size of S. 3412 should be a ceiling for tax increases in an Obama-Boehner deal, not a floor.
It gets tricky when we try to compare Option C, S. 3412, with a hypothetical Obama-Boehner deal, both because we don’t know what might be in such a deal, and especially because it’s a multi-dimensional comparison. A deal could be better than S. 3412 in some areas and worse in others. I will try to unpack those questions soon.
For now, however, it is important to understand that, even if you are unwilling to challenge President Obama’s bluff, Republicans have a third option, a legislative alternative to an Obama-Boehner deal. And that gives them and their negotiator at least a little bit of leverage.
(photo credit: gfpeck)