Why Is Obama Caving on Taxes?

By
US President Barack Obama speaks on the fiscal cliff on December 21, 2012 in the Brady Briefing Room of the White House in Washington, DC. Obama urged the US Congress to pass scaled-back package to avert tax increases and spending cuts that will take effect in the new year.
Photo: MANDEL NGAN/AFP/Getty Images

The discouraging thing about the “fiscal cliff” negotiations is not that they have gone into the eleventh hour, or that they may go into the new year, or even that they won’t resolve the long-term budget deficit. It’s that President Obama has retreated on his hard line on taxes. In the months before the election, and in the weeks after his victory, Obama had a clear position: The Bush tax cuts for income over $250,000 were ending. He would not sign any extension, and if Republicans refused to extend tax cuts for income below that level, he would hold them responsible for it until they did.

Now, by all accounts, Obama is prepared to extend the Bush tax cuts up to $400,000 a year. Or maybe more. As of Friday, Obama had told Republicans they could have the tax cuts extended on income up to $400,000 if they would accept the estate tax rising from its Bush-set rates. As of last night, Democrats were conceding the estate tax plus the higher exemption on tax rates, which had risen to $450,000. And Republicans still hadn't agreed to it! Why would they, when Democrats keep hurling money at them? By midnight, Republicans might be getting the Saturday Night Live version of Obama's offer ("a 1% raise on the top two Americans — just two people").

The erosion signals not only a major substantive problem in its own right, but it also raises disturbing questions about Obama’s ability to handle his entire second term agenda.

To begin with, the $250,000 a year threshold was too high to begin with. Obama may have needed to make the promise in order to insulate himself against suspicions of raising taxes on the middle class, but confining all future revenue to the richest 2% of the population left made it difficult to fund the government at an adequate level. Ending the tax cuts over that level would raise about $800 billion over a decade. Preserving all income under $400,000 a year would give back a quarter of that revenue.

The odd thing about the retreat is that Republicans had all but conceded eventual defeat on the issue. For a month after the election, Republicans gloomily debated amongst themselves whether to strike some kind of deal with Obama to secure spending cuts in exchange for the tax hikes that were certain to occur, or whether to simply wait until January to extend the tax cuts on income under $250,000. Obama insisted not only publicly but privately that he would not bend on taxes, reportedly telling John Boehner that the $800 billion from the expiration of tax cuts on income over $250,000 was his, “for free,” and not something he had to negotiate for.

Republicans moaned and wailed about Obama’s irrational hatred of the rich or desire to humiliate them, but none of them questioned his determination to end the Bush tax cuts over his proscribed level. The House was preparing elaborate tactics, such as voting for two different bills, to prepare the groundwork for surrender on the Bush tax cuts over Obama’s line. The notion that Republicans might push the line higher seemed utterly fanciful. Now it is simply a fact that all sides take for granted.

What happened? The administration’s line seems to be that Senate Democrats undercut, or were going to undercut, Obama’s position. “They worry that if we go over the fiscal cliff, skittish Senate Democrats will quickly fold before some House-passed plan that raises taxes on income over $750,000, does nothing on stimulus, and sets up a debt-ceiling fight for early next year,” wrote Ezra Klein, reporting the administration’s thinking. "The White House thinks it’ll be very difficult for them to veto anything Senate Democrats agree to, and so they would prefer to strike the deal themselves rather than getting into a situation where vulnerable Senate Democrats could strike a deal on their behalf.”

It’s surely true that the historical desire of many Senate Democrats to position themselves in the center of any debate, irrespective of substance, and associated desire not to upset their rich fundraising base posed a strategic problem for Obama. But if Obama fears trying to hold a line that Senate Democrats have abandoned, it’s just as likely they fear the same about him. Obama’s history of foolish negotiating with the Republican Congress gave Democrats every reason to fear he might fail to hold firm on his own line — the burden lay with Obama to prove otherwise. And two weeks ago, when Obama made a concession to Boehner that he would let the Bush tax rates stay in place on income up to $400,000, he gave them every reason to doubt him.

Now, the Obama offer to Boehner was not a full extension of tax cuts under $400,000. The plan was to get higher revenue on income below that level by reducing tax deductions rather than raising rates. But the news reporting cast the offer as simply moving up the threshold, and Obama did nothing to correct that impression. And so the effect of Obama’s concession to Boehner — which of course went unrequited — was to reset the tax debate at a new, more GOP-friendly level.

Worse, exposing Obama’s willingness to move his seemingly unmovable demand emboldened Republicans to demand even more. If they could push the line to $400,000, why not $500,000? Maybe cut Social Security too?

In 2011, in the wake of the debt ceiling debacle, Ross Douthat persuasively explained why Republicans felt no need to strike a grand bargain with Democrats — the ones he spoke with believed they would never have to face higher taxes. (“Much of the Republican 'intransigence' and 'hostage-taking' and 'terrorism' that they deplore is a direct consequence of the fact that Republicans assume that Democrats will always, always, cave on taxes.”)

The negotiating style Obama has displayed in these instances is what poker players call “tight-weak.” A tight-strong player avoids throwing in his chips, saving them for a big hand, which he plays aggressively in hopes of a huge win. A loose-weak player plays lots of hands, bluffing frequently. Tight-weak is the worst of all worlds — when you have a weak hand, you lose, and when you have a strong hand, you fail to maximize your position.

Obama is surely going to have to accept a lot of bad policies in his negotiations with Republicans (a fact I’ve argued to some of my harder-line liberal friends in several columns). But the tax cuts are the one area where he enjoys overwhelming leverage over the Republicans. Their only threat is to block extension of tax cuts on income under $250,000, a wildly unpopular stance countless Republicans have acknowledged they could not sustain for long without courting an enormous public backlash. This is the hand where Obama needed to collect all the chips.

Instead he is allowing Republicans to whittle down the sum by essentially threatening to shoot themselves in the head. And this is the most ominous thing about it. The big meta question looming over Obama’s term is whether he has learned to grapple with Republican political hostage-taking. Hostage-taking is not simply aggressive or even irrational negotiating. It is the specific tactic of extracting concessions by threatening to withhold support for policies you yourself endorse, simply because your opponent cares more about the damage. Republicans agree that the debt ceiling must be lifted, but forced Obama to offer them policies he opposed because they believed he cared more about damage to the country than they did.

Their refusal to extend the middle class tax cuts is the same thing — they support the tax cuts on income under $250,000, but demand that Obama give them other tax cuts he opposes in order to pass them.

Obama claims, and seems to genuinely believe, that he won’t let Republicans jack him up over the debt ceiling again. But if Republicans could hold the middle class tax cuts hostage, they’ll try to hold the debt ceiling hostage. Indeed, they will probably discover other areas of traditionally routine policy agreement that can be turned into extortion opportunities.

Obama may think his conciliatory approach has helped avoid economic chaos. Instead, he is courting it.