We talked about the Republicans’ doomsday plan, where they would pass the extension of the Bush tax cuts on the first $250,000 of income, allow the cut to tax rates above that to expire, and live to fight another day with more leverage. With talks at an impasse, and the President more aggressive specifically on the tax rates issue, this looks to be the emerging reality for the Republicans:
Senior Republican leadership aides say they are contemplating a fallback position since a standoff over expiring tax rates will be portrayed by Democrats as evidence that the opposition is willing to allow taxes to rise on the middle class to keep taxes from rising on the rich — and their intransigence could mean taxes go up on rich, poor and middle class alike.
The leadership officials now say that if no deal can be struck to avert the automatic expiration of all the Bush-era tax cuts and the onset of deep, across-the-board spending cuts, they could foresee taking up and passing legislation this month to extend the tax cuts for the middle class and then resume the bitter fight over spending and taxes as the nation approaches the next hard deadline: its statutory borrowing limit, which could be reached in late January or February.
“There’s always better ground, but you have to get there,” said Representative Michael C. Burgess, Republican of Texas, who made it clear he does not support allowing any taxes to rise.
Incidentally, this theory would have to meet practice. The Senate-passed bill, which Nancy Pelosi is trying to get to the House floor as a discharge petition, also raises the top rate for capital gains and dividends to 20% from 15%. It extends three stimulus-era tax breaks for middle-class families – expansions of the child tax credit and the Earned Income Tax Credit, along with a tuition tax credit. It does not include any changes to the estate tax, which means it would revert back to the Clinton-era rates of 55% on every dollar of the estate above $1 million ($2 million for couples). And it patches the alternative minimum tax, the annual ritual on Capitol Hill. Republicans disagree with pretty much all of those moves except for the AMT patch. So the bill they could allow would probably drop a lot of those other measures, and then the Senate would have to pass another bill, which they may not be willing (or who knows, able) to do. Then there’s the question of the automatic defense and discretionary cuts in the sequester. Would a deferral or cancellation of that get appended to this “doomsday” bill? A lot of this depends on whether House Republicans really want to take the path of least resistance or not.
Assuming they do, they come out of this with slightly higher taxes on the rich, in their minds a loss. However, they have renewed leverage in the form of the debt limit. Even with Treasury’s extraordinary measures, the debt limit would hit the ceiling in late February or early March. That becomes the same hostage that Republicans used in summer 2011 to get a spending cap worth $1 trillion in spending cuts. This time they would almost certainly go after social insurance programs. They would also have the leverage of not passing extended unemployment benefits, meaning 2 million Americans would fall off the cliff by losing their benefits at the end of the year.
Democrats would have a couple cards to play. First of all, the estate tax would be much higher than Republicans prefer. Public opinion would still fall on the side of the Democrats in terms of Republicans forcing a crisis; Democrats basically ensured that with their PR strategies of recent years. And depending on the timing of the sequester, Democrats could still wield that as a set of cuts, particularly to the defense budget, that Republicans don’t like (this isn’t much of a threat, since Democrats don’t really want those cuts either).
The main driver here is actually President Obama, who has been crystal clear that he wants higher tax rates on the wealthy and won’t sign a bill without it. He told Bloomberg News in his first post-election interview yesterday that “We’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it.” So this falls into “careful what you wish for” territory. If Republicans pass the tax bill and skip town, they just defer the larger fight to next year when they have higher ground. And the President would have to choose to reject THAT in order to hold his leverage, which Republicans would pounce on.
Or, the President could just get Treasury to mint a trillion-dollar coin and defuse the debt limit time bomb forever.