The Times is reporting today that, if John Boehner and the White House can’t reach a deal on averting the fiscal cliff, the House GOP is considering passing a bill that would extend the middle-class Bush income tax cuts while enacting low tax rates (possibly even lower than the current rates) for unearned income like dividends, capital gains, and inheritances, and canceling the automatic defense cuts set to begin next year.
Without knowing much more about it, this strikes me as a very savvy move for the GOP. The party’s big problem, as Jonathan Chait has written, is that it has created a whole apparatus for preventing its members for voting for tax increases, whereas in this case the looming tax increases require no votes—simple inaction will result in massive tax hikes beginning on January 1. Chait refers to this as a Maginot Line—a seemingly formidable structure that opponents simply sidestep en route to wiping them out.
What the GOP proposal suggests is that Democrats may have built a Maginot Line of their own. The party’s messaging these last few months, and especially the president’s, has been all about how taxes must rise on the wealthy. It’s a formidable-seeming message because polls show that some 60 percent of the public agrees with this stance. But it turns out it may be just as easily sidestepped as the GOP’s position. By conceding on income tax increases for the top two percent while attaching a variety of other goodies on its wish list to the measure, Republicans would put Obama in a very difficult position.
In theory, of course, income taxes aren’t the only kind of tax increase for the wealthy that Obama has been agitating for. He also wants to raise taxes on capital gains, dividend income, and inheritances. So he would have a credible and consistent rationale for opposing a bill like this. But, as a practical matter, the income tax increases have been infused with such totemic importance in this debate that Obama would be hard-pressed to oppose the bill, regardless of how much he might disagree with its handling of unearned income.
Even worse, if Obama were to go along, it would set up the exact wrong dynamic going forward. I’ve argued that in order to prevent the GOP from destabilizing the economy by resorting to extortion next year—that is, demanding enormous cuts in entitlements before it will agree to raise the debt limit (the failure of which could trigger a financial crisis)—Obama needs a fiscal cliff outcome that results in a sweeping public repudiation of the GOP and its tactics, something that can only be accomplished by going over the cliff and bringing public pressure to bear on the GOP until it folds. That way, Republicans will see that it’s not just Obama who’s trying to get them to do something they oppose; it’s the public that’s demanding it.
The problem with the GOP's fall-back proposal is that the takeaway for the party's most conservative elements will be that Obama, not the public, has forced them to allow income taxes to rise on the wealthy. They will be maximally motivated to seek a rematch next year when the debt limit comes due. And, indeed, that’s step two of the strategy the GOP is considering, according to the Times.
Having said all that, there are two potential problems here, one or the other of which is likely to derail the whole diabolical plan. First, as the Times points out, even if the House GOP managed to pass such a bill and get Senate Republicans on board, it’s entirely possible that the Democratic Senate, recognizing that it backs Obama into a tough position, would kill it before it got to his desk. That wouldn’t be ideal, since it would let Boehner reclaim some of the political high ground he’s lost over the past year-and-a-half. (We passed the middle class tax cuts the president said he wanted!) But it would probably be necessary. More to the point, though, I have a hard time seeing how this passes the House in the first place. Even though the new idea would net the GOP about as much as it could possibly hope for in this situation, given the leverage Obama has, I suspect a number of House conservatives—probably too many—will consider allowing income taxes to rise on the top two percent the kind of abject capitulation they simply can’t abide. If that’s the case, Obama will have been saved yet again by the breathtaking irrationality of his opponents.
Update: We initially cut a few lines from this piece by mistake in the rush to get it up quickly. I've restored them and tweaked a few other sentences for clarity.