The conventional wisdom insists that President Obama has all the leverage right now over the Republicans in their negotiation for a “grand bargain” to close the budget deficit. Bolstered by his smashing election victory, gains by the Democrats in both houses of Congress and a changing popular mood, this would seem like the ideal moment to forge a deal largely on the president’s terms—one that would raise federal income tax rates on the wealthiest Americans while cutting spending and “reforming” Social Security, Medicare and Medicaid.
Proof of Mr. Obama’s upper hand is seen in the dropping stock of anti-tax zealot (and forced-abortion apologist) Grover Norquist. One after another, Republicans even in deep red states have been forswearing their previous oaths to Mr. Norquist never to vote for any tax increase. Surely, the president—renowned “Zen master,” and player of “three-dimensional chess”—hovers on the brink of another improbable victory, one that will secure his historical legacy. Right?
Nothing could be further from the truth.
In fact it’s Mr. Obama, not the Republicans, who is caught between a rock and a hard place. To hit our tenuously recovering economy right now with tax increases (even on the very wealthiest) and massive cuts in federal spending is a terrible idea. It could easily push us into a “double-dip” recession. To cut entitlement benefits and push back the age at which Americans can retire—possibly all the way to 69—will also be economically disastrous, not to mention unspeakably cruel and a grotesque betrayal of the president’s own base. It could split the Democratic party beyond repair.
The Republican leadership surely must understand this. What’s more, they have the “fiscal cliff” at their back—the bill they passed during the budget crisis they manufactured last year that mandates severe, automatic, across-the-board spending cuts if no bargain on the deficit is reached. This would likely dip us back into recession as well, and probably set off chaos in the financial markets.
It is widely thought that going over the fiscal cliff will rebound worst against the Republicans, since they will be seen as more intransigent than ever. But what do they care? The one branch of the federal government controlled by the GOP is the House, where nearly all their members hold safe seats in deeply conservative districts. They can probably weather the national outrage against diving off the “cliff” even if it does mean another recession, and they know it.
So, if President Obama fails to reach an agreement on the deficit, he’ll probably set off a worldwide financial panic, and plunge the country back into recession. If he does reach an agreement, he’ll likely alienate most of his own party … and plunge the country back into recession.
The various, “outside-the-box” alternatives now being offered are no more appealing. House Speaker John Boehner and other leading Republicans have been floating the idea of raising additional tax revenue by closing loopholes instead of increasing rates, so they can kinda sorta say they didn’t really raise taxes.
But closing all the loopholes in existence won’t raise enough revenue. If this approach ever becomes law, it should be called “The Washington Lobbyists Full-Employment Act.” Essentially, this was the idea behind the big Reagan tax reform compromise of 1986: income tax rates were lowered and simplified, in return for eliminating most exemptions. But as the last quarter-century has proved, there’s nothing easier for a lobbyist to do than slip a loophole back into the tax code a little down the line.
Most professional economists would prefer a “tax on consumption” rather than income, through either a national sales tax or a value-added tax at various stages of production.
I can never understand why this is such a great idea, since any capitalist economy is driven by consumption, whereas great accumulated wealth gives people an inherent—and often unfair—advantage. Shouldn’t we be trying to encourage people to make as much money as they can … then even out the results a little, so that those who have made more can’t use that added income to, say, buy lobbyists and economists to espouse policies in their interests?
On a more practical level, any sort of sales or consumption tax ought to be entitled, “The Mafia Restoration Act.” That’s because of the thousands of industrious citizens who will purchase cargo vans and start actively driving goods in from Canada to sell on the black market if any such tax is ever passed. (Full disclosure: I, too, intend to buy a truck and start shipping goods in from Canada if this happens.)
So where does that leave us? What should a true Zen master do when faced with this menu of unsavory choices?
He should fold.
That’s right. President Obama should offer to give in and support extending the Bush tax cuts for another year, if—and this is a mighty big “if”—the Republicans agree to abolish the fiscal cliff.
Getting an extension of the payroll tax suspension and unemployment payments would also be a good idea, but this one concession is imperative: get rid of the cliff.
Think about it. With the economy showing sure signs of recovery at last, President Obama will only be in a better position a year from now. As Europe insists on sticking to its own austerity programs and China’s economy continues to slow, we will likely be in a post-World War II situation—the only promising investment opportunity left standing. International capital will pour in, accelerating our recovery and starting to shrink the deficit “naturally.”
A year from now, with the economy humming along at last, there would also be no fiscal cliff, no need to slash benefits for seniors or make them die in harness. If Republicans don’t want to accept his budget terms, the president can simply let the Bush tax cuts expire at last.
This scenario would mean higher taxes for the middle- and working classes, which is not ideal. But they will be much better able to afford them during an economic boom. Meanwhile, the rich will at last be forced to pay the extortionate federal income tax rate of 39 percent they labored under during the Clinton years. And all of these new payments will at least continue to ratchet down the debt, appeasing the deficit hand-wringers without the need to punish the elderly and the indigent.
This is what a president who is really a Zen master—instead of, say, a diffident individual always willing to accept the conventional political and economic wisdom—would do. Which is President Obama? We’ll soon find out.