By: Peter Suderman
Originally Appeared in: www.reason.com
Who actually has the leverage in negotiations over the fiscal cliff—and the extension of Bush-era income tax cuts in particular? On the surface, it might look like Democrats, who control the White House and the Senate, have the upper hand. But House Republicans may have more leverage than is immediately apparent.
Right now there are two competing theories about the fiscal cliff negotiations. The first says that President Obama has the most leverage. His party controls the Senate, and he has to sign off on any deal. He has the bully pulpit, and he has argued extensively that the election was to a large extent about raising taxes on top earners. More importantly, the policy landscape favors raising taxes on top earners. Because the Bush-era tax rate cuts expire automatically, all President Obama actually has to do is wait. Taxes will go up automatically on everyone. At which point it should be even easier to get Republicans to agree to lower taxes on income below $250,000 a year.
That’s the basic logic underlying GOP Rep. Tom Cole’s argument that the best way for Republicans to move forward is to fold quickly, by agreeing to extend the Bush tax cuts for all but top earners. Doing so, he says, would rob Democrats of a crucial argument: that Republicans are holding up an extension of the middle class tax cuts in order to protect the rich from a taxhike. Republicans could then negotiate tax rates for top earners separately. And even if Republicans couldn’t get a deal to keep current tax rates for top earners, allowing their taxes to go up would only give Obama half a loaf: The president has asked for $1.6 trillion in new tax revenue. Letting rates rise on top earners would raise a little less than $1 trillion.
In theory, then, President Obama has it easy: If he does nothing, he’ll eventually get what he wants. So why would he sign any deal that doesn’t raise taxes on high incomes?
The answer is that he and his economic team believe he needs to sign a deal—any deal—in order to prevent an economic calamity.
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