Why Obama Now Holds The Whip Hand

Bill Scher

Progressives ranging from Paul Krugman, Noam Scheiber, Greg Sargent and OurFuture.org’s own Robert Borosage are down on the latest tax deal. They feel President Obama caved on the threshold for higher tax rates and, in turn, set himself up another another bad deal in two months by failing to raise or nullify the debt ceiling.

But the opposite is true. The Republicans are the ones who caved on their fundamental principle.

And they did so because, unlike in 2011, they are now more afraid of being blamed for any legislative gridlock that sparks economic catastrophe than they are of the Tea Party. They will face similar conditions (yet with far more dire potential consequences) when we near the debt limit in approximately two months.

First, let’s dispense with the misnomer that President Obama violated a pledge by accepting a $450,000 income threshold for higher tax rates on couples. There’s a big difference between a bargaining position and a red line.

President Obama’s specific campaign position was that higher rates on income above $250,000 was his preference. But his campaign rhetoric did not always insist upon that. For example, his big television ad laying out “The Choice” stated a more abstract principle that “the wealthy [should] pay a little more so we can pay down our debt in a balanced way.”

More importantly, in his first post-election press conference, where he laid down his initial negotiation markers, he did not declare any number to be non-negotiable. Summarizing his mandate from the election, he said:

…when it comes to the top 2 percent, what I’m not going to do is to extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars …

… And I think it’s important to establish a basic principle that was debated extensively during the course of this campaign … If there was one thing that everybody understood was a big difference between myself and Mr. Romney, it was when it comes to how we reduce our deficit, I argued for a balanced, responsible approach, and part of that included making sure that the wealthiest Americans pay a little bit more.

I think every voter out there understood that that was an important debate, and the majority of voters agreed with me.

Finally, when pressed by the media, Obama’s team would always subtly dance around the question whether they would budge from their initial offer of higher tax rates for all income above $250,000. For example, here’s Treasury Geithner on Fox News Sunday in early December:

***

CHRIS WALLACE: Does he insist on raising the top rate from 35 percent all the way up to the Clinton rate of 39.6 percent, or would he compromise on something lower, like 37 percent? Is that negotiable?

GEITHNER: We’re not going to extend an extension of the tax rates for the top 2 percent. We think they should go back and need to go back to Clinton levels. And let me explain why we believe that.

WALLACE: So, I just — to answer my question, specifically, you are saying nonnegotiable, 39.6 percent?

GEITHNER: Again, we think that’s the way to do it. Let me explain why, OK? If you don’t do that, it costs a trillion dollars — roughly a trillion dollars over 10 years.

WALLACE: Not if you went to 37 percent.

GEITHNER: Again, you’re — you’re –

WALLACE: Well, that’s one of the ideas that’s out there, sir. I’m not just making this up.

GEITHNER: That’s true. There’s lots of ideas out there. And, again, what we’re — we are proposing to let those rates go back to Clinton levels.

***

Geithner would only say “we think” and “we are proposing” but never that the initial offer was non-negotiable.

In turn, the final deal was squarely based on the principle Obama laid out in the campaign: the wealthy are going to “pay a little bit more,” with higher income tax rates and capital gains tax rates on approximately the top 1% of income, and deduction caps on approximately the top 2% of income.

The only principle that got trashed in this deal is the Republican principle that we should never raise tax rates on the wealthy.

In November, Speaker John Boehner repeatedly dismissed the prospect of accepting higher tax rates. For example:

* “I outlined a responsible path forward to avert the fiscal cliff without raising tax rates.”

* “The problem with raising tax rates on the wealthiest Americans is that more than half of them, are small business owners. We know from Ernst & Young, 700,000 jobs would be destroyed. We also know that it would slow down our economy.” (Not true.)

* “By lowering rates and cleaning up the tax code, we know that we’re gonna get more economic growth. It’ll bring jobs back to America. It’ll bring more revenue.”

* “We are not going to hurt our economy and make job creation more difficult, which is exactly what that plan would do. It’s not the direction that we want to go because it’s going to hurt job creators in America.”

Now Boehner was careful not to say he would never ever ever accept a compromise that raised rates. Nevertheless, the basic principle he laid out — the governing principle of the Republican Party for the last 20 years — was completely shattered.

Because this compromise rests on Obama’s principle, not Boehner’s.

So why did Boehner sit back while his Senate Republican counterpart crafted this deal? Why did nearly all Senate Republicans vote for it? Why did Speaker Boehner and scores of his fellow Republicans vote for their first tax increase on the wealthy in decades?

We can’t read minds. But presumably, general public opinion matters a lot more to Republicans than Tea Party opinion, now that the election season is over.

In 2011, during the last manufactured debt limit crisis, Republicans may have believed that any economic catastrophe may have largely tarred the President heading into a re-election campaign. Why not threaten to burn the economy down unless they get their way?

Now, Obama isn’t going anywhere. The next election that congressional Republicans have to face is their own.

And poll after poll showed Republicans would suffer the blame if there was no deal.

Individual House Republicans may have to worry about Tea Party primary challengers, but the party has to worry more about the general electorate if they want to keep control the House.

Fear of being blamed for the financial markets tanking trumped fear of the Tea Party. And so, Republicans flinched.

Scheiber argues that this experience “affirmed the White House anxiety that the GOP might not blink before we default.” How’s that? Republicans just blinked at the prospect of a far less consequential market dip.

Even when Obama’s back was against the wall in 2011, he managed to wrest a creative compromise that created this “fiscal cliff,” building a new set of incentives to crack Republican resistance on tax increases. It worked.

Now that we know Republicans can be broken, now that we know Republicans do fear public scorn if their ideological rigidity sinks the economy, it is Obama who holds the whip hand for the next round of budget talks.

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