High stakes as America swiftly approaches fiscal cliff

Unlike parliamentary systems, James Madison’s constitution does not work on the principle of “winner take all.” The 48 percent of the people who voted for Mitt Romney maintain a bastion in the House of Representatives, where the Republican majority lost only a handful of seats. Neither they nor the president can force the other side to capitulate, so there are only two options — to compromise or to accept the consequences of non-agreement. What are the prospects?

President Obama asserts that he campaigned and won on a pledge to eliminate the Bush tax cuts for the top 

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2 percent of households. It is hard to imagine that he would sign a deal to extend them, as he did after the November 2010 midterm elections. House Speaker John Boehner (R-Ohio) has reopened the door to a deal that would include increased revenues from sources not confined to economic growth. But he has drawn the line at higher tax rates, and he has linked agreement on revenues to restraints on the growth of entitlement programs. For his part, Senate Minority Leader Mitch McConnell (R-Ky.) has responded to the election with an obdurate growl: it is the president’s responsibility to move to the center and send the Senate a plan that can actually pass with support across party lines, he says. 

On the other side of the aisle, many liberal Democrats reject the 1986 tax reform plan — broader base, lower rates — as a template for today’s legislation. Instead, we should raise rates at the top and use the proceeds from base-broadening to reduce the deficit and shore up vulnerable domestic programs. On the spending side, liberals insist that discretionary spending cuts made in 2011 should temper additional reductions in any broader agreement, and they are mobilizing to prevent Obama from returning to the entitlement changes he entertained during the failed “grand bargain” talks. Meanwhile, centrist Democrats, now joined by leading CEOs, continue to support a grand bargain along the lines of the Simpson-Bowles and Domenici-Rivlin plans.  

Through the fog of positioning, it is possible to discern the elements of a potential deal, through legislation that subsumes the zero-sum issue of the Bush tax cuts under the broader heading of tax reform and links it to a parallel vehicle for addressing spending issues. This deal would have the structure and force of a reconciliation bill: the spending and revenue committees would be instructed to report out bills that would meet specified budget targets by a certain date, backed by credible default arrangements that would go into effect if the committees failed to complete their work.

But how do we get from here to there?

In recent months, influential Democrats have argued that non-agreement — that is, going over the fiscal cliff — is the preferable course. Once a new budget baseline wipes out the Bush tax cuts, they  say, discussions can resume over a reformed tax code that promotes growth, simplifies the system and makes the wealthiest Americans pay their fair share. One problem with this approach is that the cliff includes more than the expiration of the tax cuts; the alternative minimum tax, the “doc fix,” sequestration and the debt ceiling are also at issue. The legislative baseline favors the Democrats in some respects but not others. 

Another problem: fiscal policy affects the real economy. Many analysts believe that markets at home and abroad would react negatively to continued gridlock. The CBO predicts that going over the cliff would produce a recession in 2013 — surely that is not the way Obama would like to begin his second term.  

If Republicans believe that Democrats are willing to plunge over the cliff, goes the argument, they will give ground to avert it; if they don’t, they’ll take the brunt of the public blame and will be forced to yield even more in 2013. But what if the House Republicans conclude that the people they represent want them to stand firm and that they will pay a higher political price for what their supporters will see as surrender? And what if they judge that the president has more to lose from an economic slowdown than they do?

Recent reports suggest that rather than settling for off-stage negotiations, as he did in 2011, the president is prepared to take this issue to the country. This would represent a high-stakes gamble that he could use to force House Republicans to move in his direction. If he succeeds, he will begin his second term in triumph. But if he fails, he will return to negotiations with a weakened hand. 


Galston is a senior fellow in governance studies at the Brookings Institution.

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