The Logic of a January Fiscal Cliff Deal

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NEW YORK, NY - DECEMBER 30:   The Times Square New Year's Eve Ball is tested the day before New Year's Eve on December 30, 2011 in New York City. The 11,875-pound Waterford crystal ball will descend a 130-foot tall flagpole to mark the beginning of 2012. (Photo by Mario Tama/Getty Images)
Photo: Mario Tama/2011 Getty Images

Since November 6, the center of the tax debate has moved left with remarkable speed. Last year, Republicans threatened to harm the credit rating of the United States — forever! — rather than accept President Obama’s plan to raise a mere $80 billion a year while cutting tax rates. Now things have moved to the point where Republicans are making casual admission like this one, to conservative reporter Byron York:

[M]any in the GOP do not believe that raising the rate on top earners from 35 percent to 39.6 percent (the rate before the Bush tax cuts) would seriously damage the economy. Second, they know that most Americans approve of higher taxes on the top bracket, and President Obama, having campaigned and won on that platform, seems dead-set on higher rates. Third, they fear that if the government does go over the cliff and Democrats propose re-lowering taxes for everyone except the highest earners, Republicans would be in the impossible position of resisting tax cuts for 98 percent of the country on behalf of the top 2 percent.

You don’t think a top tax rate of 39.6 percent will harm the economy anymore? It’s a nice concession, but keep in mind that Republicans went ballistic against Bill Clinton’s deficit reduction plan in 1993 because it raised the top tax rate to 39.6 percent, then they turned a surplus into deep structural deficits in order to push that rate back down under George W. Bush. A little “sorry for the last two decades of economic policy” from the Republicans would be nice here.

Anyway, we’ve clearly passed the threshold of the GOP leadership understanding its lack of leverage on taxes here. The main impediment, as I’ve argued, is the mechanism of accepting this reality. Republicans may not want taxes to go up, but what they really don’t want is to be seen as complicit in a tax hike. The GOP’s options for dealing with the expiration of the top-end tax cuts are as follows:

  1. Cut a deal now (or at least before January) with Obama to set tax rates at a mutually agreeable level.
  2. Vote to lock in the Bush tax cuts on income under $250,000, then strike a deal with Obama next year.
  3. Do nothing, wait for all the tax cuts to expire, then wind up voting to extend them on income under $250,000 after the party takes a hit from public opinion.

From the standpoint of getting the best deal, and from the standpoint of broader public opinion, option No. 1 is the best and No. 3 is the worst. But from the standpoint of satisfying the internal demands of conservatives who primarily want their leaders not to “sell them out,” the order is reversed. Option No. 1 means “voting to raise taxes.” Option No. 2 is sort of voting to raise taxes, though Republicans may use some trick like voting “present” to avoid actually casting a vote. And option No. 3 lets the higher taxes happen without any vote at all. Republicans can vote for a tax cut.

That’s why a deal in early January probably makes the most sense for all sides. The effects of the fiscal cliff are cumulative, and the economic damage from waiting shortly into the New Year will probably be minimal to nonexistent. But the political dynamic resets in a way that makes a deal much easier to strike. Obama would already have most of the revenue he’s asking for. He could get all the additional revenue he needs without raising rates — he could even let rates drop a point or two to make Republicans feel better about things. Then the deal gets very easy for both sides.