The Debt Negotiations

July 12th, 2011

I’ve been quiet on the ongoing national debt negotiations between the White House and Republicans. The reason I’ve been quiet is the debate’s been long on speculation and short on facts. There’s a bit more leaking out now, though, so here’s what I’m thinking.

The consensus seems to be that Democrats (the White House, anyway; Congressional Democrats want to do no such thing) are willing to offer entitlement cuts in return for increasing taxes on individuals with income over $500,000 and eliminating tax exclusions, deductions and credits, while Republicans are unwilling to accept the deal because they refuse to vote for any tax increases.

That’s basically accurate; I disagree that Democrats are being truly ernest here (putting entitlements on the table seems more like a tactical move by the White House to make the President look like someone who’s willing to compromise while actually risking very little, because Republicans already pledged not to raise taxes), but that doesn’t matter much right now, because that’s what the White House has offered and the Republicans turned it down.

Ezra Klein nicely sums up the problem:

We’ve reached an equilibrium where Republicans can’t accept any revenues and Democrats can’t accept a deal without any revenues. And I use the word “revenues” advisedly. There was a brief, shining moment when it seemed the deal would be changes to the tax code that did raise revenues but didn’t increase rates and so Republicans wouldn’t count as tax increases. But Cantor and others have made clear that they will oppose any net increase in revenues. So there’s no deal until something breaks the equilibrium. Right now, the most likely candidates, in order, are public fury arising out of a government shutdown or a market panic arising out of near-default.

I’ll end on a more speculative note: Republicans might come to regret rejecting Boehner’s deal.

That’s right, and that’s why what the Republicans are doing is truly idiotic. By hanging tough on raising the debt limit, Republicans have already succeeded in forcing the White House to acknowledge entitlement spending needs cut, something they’ve refused to do beyond the most use meaningless of platitudes politicians are so fond of. That’s a victory. They also made tax reform a 2011 issue, when Republicans have most of the leverage, rather than a 2012 one—when the Bush tax cuts are set to expire and therefore the Democrats have leverage.

By showing their willingness to reduce the deficit through increased revenue from the tax system, Republicans could conceivably cut a deal where tax exclusions, deductions and credits are reduced (which, everything else held equal, would increase revenue) and overall tax rates are reduced, just as the President’s own fiscal commission proposed. If Democrats aren’t willing to accept that, then at least they tried to increase tax revenue (ostensibly what Democrats are seeking) in exchange for absolutely necessary spending cuts.1

That’s a much better deal than they’re going to get next year, and even if Democrats refused to accept it, Republicans would look much better with independents. They could say, accurately, the Democrats are the “party of no”—that they offered Democrats a chance to eliminate tax breaks for wealthy taxpayers and to reduce tax rates for everyone, and Democrats refused the opportunity. By doing so, Republicans would, at worst, call the White House’s bluff on entitlements and, at best, get the best tax deal possible with a DNC-controlled Senate and White House.

John Boehner tried to do exactly that over the weekend, but from what it sounds like, the party rebuked his plan. Eric Cantor has said since that the party will not accept any increase in tax revenue.

The Republican party’s base is so blinded by their hatred for taxes that they’re unwilling to accept their own victory because it’ll increase tax revenue, and there’s no Republican leader with enough clout and cover to accept a deal that increases tax revenue.

I have to hand it to the White House for making the offer—it’s a brilliant tactical move. His “grand bargain” had very little chance of passing even if Republicans signed on, because Democrats in the House and Senate would (and have) balked at cutting Medicare, Medicaid and Social Security, and so he was risking very little by doing so. Making the offer was all upside for Obama politically; it made him look like someone willing to compromise for our financial security, while in reality there was zero risk of having to make good on his offer. That’s a smart political move.

And that’s precisely why, politically-speaking, Republicans should counter the President’s proposal with an offer of eliminating exclusions, deductions and credits in return for lower tax rates. If Obama accepted it, that would force the White House to attempt to corral enough votes in the House and Senate for their plan. If he succeeds, great; Obama will receive a bump with independents, but he’s going to have that regardless of whether Republicans accept or reject it, and I’m not sure how much it’s going to matter in November 2012 when unemployment is still above 8 percent. Republicans, for their part, will receive (1) the best tax reform deal they’re going to get, (2) substantial cuts to entitlements, and (3) their own plaudits with independents. That’s a win, and a victory they should gladly accept.

But until a figure emerges in the Republican party that’s respected enough among the base to cut a deal, it’s not possible. And that’s the issue here: Boehner’s doing exactly the right thing, but he simply doesn’t have enough power in the party to do it. No one does.

  1. It’s worth noting that Obama’s apparent tax proposal—to keep tax rates where they are for now and eliminate tax exclusions, deductions and credits—is absolutely ludicrous. The President’s own fiscal commission sought to increase tax revenue to 21 percent of GDP and it did so by eliminating those tax expenditures and decreasing the top tax bracket’s rate from 35 percent to 26 percent. Obama’s proposal would amount to a gigantic tax increase. []