Not a Question of "If," But "When"

On the Sunday talk shows, newly reelected Senator Claire McCaskill (D-MO) stated an obvious with respect to the current fiscal cliff dilemma. Now personally, part of me says let us all hold hands and jump over that cliff together. When taxes increase on everyone and spending is cut, we on the Right can then say to the 51% of Americans who reelected Barack Obama: “How are you feeling now?” But like most of you, I cannot afford another $2,200 in federal taxes. When the jobs of an estimated 800,000 defense workers are put at risk, we can ask the voters of Virginia, “Did you really make the right choice?” But for security purposes, I do not want see 800,000 defense workers laid off anywhere. And there are other collective hurts that will be shared by all Americans that will seriously threaten Obama’s precious favorability ratings. No doubt, they will take a hit as not all blame will be placed on an intransigent Republican House and “obstructionist” Republican Senators.

However, let us look at reality as expressed by McCaskill. All along, Obama has stated that the “middle class” will not face a tax hike. McCaskill simply mentioned the obvious extension of that belief. Assume both sides hold true to their positions- Republicans refuse to raise tax rates and Democrats say no to entitlement reform now. Come January 1st, we fall off that fiscal cliff together. Does anyone doubt that within 48 hours of the new Congress being sworn in that an emergency bill will be introduced re-instituting the Bush tax cuts on all but those making over $250,000 a year? Does anyone doubt that the payroll tax holiday will be re-instituted?

The political ramifications to the Republican Party for voting against this in the new Congress will hurt the GOP not only in the 2014 midterms, but in the 2016 Presidential race. No politician, especially a Republican, wants to be in the position of voting “NO” on a middle class tax tax cut that, for all intents and purposes, is not really a tax a cut but a return to the status quo sans breaks for the wealthiest 2%.

One needs also to look at an early stage at the 2014 political landscape where all House seats are up for reelection. The GOP currently has the majority in the House and should maintain that status after the 2014 midterms. However, based upon recent trends and the new parameters of the current congressional districts, there are several out there currently represented by Republicans where Obama came close to winning in 2012, if not winning outright. Several of these districts are not in the usual suspect states of California, New York, and Illinois. They are districts in Ohio, Florida, Wisconsin, Michigan and even a few in Texas. Imagine if any Republican currently representing these districts votes against that return to the status quo. They will be pilloried and attacked not only from within the party, but also by the Democrats. Hence, they will acquiesce and vote for what the Democrats are demanding now- only it will occur later in this scenario.

Most economists on both sides of the ideological fence generally agree with various caveats that raising the tax rate from 35% to 39.6% for couples making over $250,000 a year will not seriously affect the overall economy. Of course, it will have some effects. Some may move their money elsewhere into tax shelters and business owners may not hire or expand, or at least put off those plans. But overall, there will not be fiscal calamity. Additionally, as people like Paul Ryan and Dick Durbin and Chuck Schumer rightfully note, the President’s $250,000 threshold will hurt may small business owners. Instead, why not come down somewhere in the middle- maybe households over $500,000? It may cut down on the revenue generation figures, but not if deductions are capped on a graduated basis. Democrats demand progressivity in the tax code; this is progressivity. Again, that would demonstrate Republican willingness to increase tax rates at a threshold even below that suggested by some rather liberal Democrats! There are reports that Democrats like Max Baucus of Montana and Mary Landrieu of Louisiana oppose raising the estate tax. There are voices of reason and moderation in the Democratic Party. Unfortunately, Obama is not one of them with his Chicago-style scorched earth policy and rhetoric.

Thus far, Democrats have portrayed Republicans as beholden to the “no tax increase” mantra best expressed through the infamous Norquist pledge. Personally, I think politicians are fools for cornering themselves through a pledge, but that is another story. But, let us assume Republicans are beholden to this mantra. Is it any worse to the fact that Democrats are beholden to protecting from reasonable reforms their sacred cows- Social Security and Medicare?

Given that rates are going up on the top 2% of earners either way, the GOP should just acquiesce and give Obama that little victory because realistically, it is just that- a little victory. It will raise about $80 billion a year, hardly enough to solve this country’s fiscal woes. But, I say that in the interest of “fairness-” yes, steal the Democratic line- we also discuss a graduated system of limits on deductions for the higher earners to potentially bring in even more revenue. In other words, “see” Obama’s tax rate hike and raise the stakes on his “fairness” argument and take it away from him.

But then, we “call” by making specified entitlement reforms a part of the total package. And, this is no bluff. The Democrats either acquiesce to entitlement reform or we walk away from the table. When the new Congress convenes, since all revenue bills have to originate in the House, then Boehner can play hardball and refuse to advance any bill that does not meet Republican demands, and that includes leaving higher tax rates on everyone, no payroll tax holiday, no extension of unemployment benefits, no AMT fix, a potential lay off of 800,000 defense jobs, etc. Furthermore, we make the case now that Republican concessions above and beyond what Obama and the Democrats demand with regards to the top 2% is a huge give-away in exchange for entitlement reform. As part of that, we trot out every statement by every Democratic talking head and politician where they acknowledge that entitlements are the primary cause of the nation’s deficit and debt. They know it, we know it, the “experts” know it and the people intuitively know it. Hence, we totally turn the tables on Obama and make him look like the intransigent, obstructionist ideologue beholden to his own special interests. He may have the temporary rights to gloating, but it is the GOP that will come out the eventual winner in 2014 and 2016.

As part and parcel of this, ceding the power to raise the debt limit to the Executive branch is completely off the table. That is an audacious power grab cloaked in the language of liberalism. It is a move more akin to those of a Morsi than any American President. One does not hand over one of the keys to the hen house to the fox whether that fox is Democratic or Republican. And incidentally, those entitlement reforms must be real cost savers and not some amorphous agreement to discuss the issue in the future, maybe. By “real cost savers,” they cannot include the $700+ billion already being taken from Medicare to fund Obamacare or the savings from the wind down of hostilities and an American presence in Afghanistan. The days of Obama double and triple counting “savings” is over.

While to many this may represent surrender on the issue, I look at it more as political reality. I look at it more as forcing the President and the Democrats to get serious about cutting spending and not playing up talking points or trimming around the edges. It is all well and good that Congress is whittling down the costs of a farm bill, as McCaskill noted as an example of “painful” spending cuts. It is interesting that she would place that example in the “painful” category when on the very same show, Geitner, in highlighting some good things about the Obama economy, noted that farm production and income is the highest in decades despite a drought. But, that is yet another example of the inconsistency of the general Democratic argument when it comes to spending cuts.

This strategy will reveal the hypocrisy of that argument. It will prove that the Republican Party is serious about revenue generation, but the Democratic Party is not serious about cutting spending. And a recent poll shows that most Americans believe that entitlement reform and spending cuts are just as important as raising taxes on the top 2%. This strategy will box in the Democrats and Obama. It is not a question of “if,” but the “when” should be now. After January 1st, the GOP loses even more political leverage other than the debt limit,possibly as early as February.