June 24, 2018
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Why the White House thinks it’s winning

Michael Reynolds | Abaca Press
Michael Reynolds | Abaca Press
President Barack Obama waves after delivering remarks on the ficscal cliff at a White House event with middle-income Americans, at the Eisenhower Executive Office Building in Washington, D.C., December 31, 2012.
By Ezra Klein, The Washington Post

Consider the “fiscal cliff” negotiations from the White House’s perspective.

The specifics of the McConnell-Biden deal were fluid, but the bottom line seemed to be this: It raises taxes by $600 billion over 10 years, secures important Democratic priorities such as unemployment insurance and the stimulus tax credits, and doesn’t include any spending cuts of note.

Here are the details, as sources close to the talks have described them: The top tax rate rises to 39.6 percent for people making more than $400,000 and families making more than $450,000. Capital gains and dividends will be taxed at 20 percent with the same income thresholds. The personal-exemption phaseout is set at $250,000, and the itemized-deduction limitation kicks in at $300,000. The AMT is patched permanently. Estates up to $5 million would be exempt and taxed at 40 percent above that.

The various business tax credits — R&D, wind, etc. — would be extended through 2013, as would unemployment insurance. The stimulus tax credits — namely, the expansions of the earned-income tax credit, the child tax credit and the college credit — would be extended for five years, which is hugely important to the White House. The scheduled pay cuts for doctors in Medicare would be averted for a year through spending offsets. The treatment of the sequester is still up in the air, because the president is refusing to offset it unless revenue is part of the mix.

White House officials aren’t thrilled with this package. But it looks pretty good to them. As they see it, it sets up a three-part deficit-reduction process. Part one came in 2011, when they agreed to the Budget Control Act, which included more than a trillion dollars in discretionary spending cuts. Part two will be this deal, which is $600 billion — and maybe a bit more — in revenue. And part three is still to come, but any entitlement cuts that Republicans want will have to be matched by revenue generated through tax reform. If Republicans want $700 billion in further spending cuts and the White House insists on $700 billion in tax reform, it will end up with more revenue than in Obama’s final offer to House Speaker John Boehner.

The White House laughs off the GOP’s theory that it can use the debt ceiling to extract big spending cuts without further tax increases. For one thing, Boehner wouldn’t know how to achieve his “dollar-for-dollar” rule if you gave him total control of the budget. Raising the debt ceiling will cost around $1.5 trillion through 2014. Boehner has never named $1.5 trillion in spending cuts. In fact, he hasn’t named many entitlement cuts at all.

“You either cut Medicare or we default the country?” says one top Democrat, describing the fight the GOP is setting up. “And we don’t have the guts to put out our Medicare cuts so you need to put them out for us? And now you need to round up the Democratic votes to help us blackmail you? That’s the plan?”

One problem the White House is having is that its congressional allies don’t see it the way it does. “The direction they’re headed is just absolutely the wrong direction for our country,” Sen. Tom Harkin, D-Iowa, said on the Senate floor Monday. A top Democratic Senate staffer e-mailed a similar sentiment. He’d heard the McConnell-Biden deal was in the range of $660 billion. That’s “$940b below the President’s initial position, $340b below Boehner’s last offer, and $140b below the $800b the President told Boehner he gets for free,” he griped.

Nor is there much confidence that the White House will be able to stick to a dollar-to-dollar match in the next round of negotiations. “Politics-wise, this was the moment of maximum leverage, not the debt ceiling talks,” the staffer said.

White House officials argue that Senate Democrats are one reason they don’t have as much leverage on taxes. The bill that Senate Democrats passed to let the Bush tax cuts lapse for income over $250,000 was to last a year. And even if it had been a 10-year bill, it would have raised only $700 billion. As the White House sees it, it is getting 85 or 90 percent of the revenue from that bill plus jobless insurance plus the stimulus tax credits plus the business extenders. Their bill is permanent, and it might be able to pass the House.

Assuming the details of this deal are close to what I’ve outlined, the question of whether the White House outfoxed the Republicans or capitulated too early won’t be clear until we see the outlines of the next deal. If the White House is able to pocket this revenue and extract a 1-to-1 match, or something close, for any further spending cuts, it’s liable to end up looking smart. But if, as Republicans believe and some Democrats fear, the White House folds when confronted with the debt ceiling and agrees to big entitlement cuts in return for little or no revenue, this deal will be the moment when the White House blinked and traded away the guaranteed revenue of the fiscal cliff for a lowball GOP offer.

Ezra Klein is a columnist at the Washington Post. His work focuses on domestic and economic policymaking, as well as the political system.

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