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The Inside Story of How Obama Could Have Gotten a Better Tax Deal Without Biden

Even for Barack Obama's liberal critics, there was much to like about the way he set up last week's fiscal deal, not least the use of his presidential perch to drive home his message on taxes. As my colleague John Judis argued, it's easy to see how Obama could reprise this approach for the next installment of our ongoing fiscal soap opera. The GOP's plan to force Medicare and Social Security cuts under threat of a debt default could prove wildly unpopular with the right White House framing, and Obama has proved himself pretty capable in this department.

The problem is what happens when, having crafted a favorable backdrop to the negotiation, it comes time for him to close the deal. And this is where the just-completed "cliff" episode is still disconcerting. Because it turns out Obama made a critical if underappreciated mistake in the final hours of the back and forth: sending Joe Biden to haggle with Senate Republican leader Mitch McConnell once McConnell's talks with his Democratic counterpart, Harry Reid, had broken down.

From my after-the-fact discussions with Democratic aides in the House and Senate leadership, it’s clear that Reid had a plan for resolving the cliff and considered the breakdown of his talks with McConnell very much a part of it. By involving Biden, Obama undercut Reid and signaled that he wanted a deal so badly he was unwilling to leave anything to chance, even when the odds overwhelmingly favored him. It suggested that even if Obama plays his cards exceedingly well in the run-up to the debt-limit showdown, he could still come away with a worse deal than he deserves because of his willingness to make concessions in the closing moments.

Here’s what happened near the end of the cliff talks, as I understand it. On Friday, December 28, Obama handed off the negotiations to Reid and McConnell, with the caveat that he wanted a vote on a fallback plan to raise taxes on income above $250,000 for couples (and $200,000 for individuals) if they couldn’t strike a deal by Monday the 31st. The two Senate leaders made some progress but hit a wall Saturday afternoon. Reid had offered to move the threshold up to $450,000 for couples and $360,000 for individuals in exchange for a one-year extension of federal unemployment benefits and delaying the automatic spending cuts known as the sequester for a year. McConnell was unwilling to go so low on the income-tax threshold or so long on the sequester delay. He was also asking for a change to Social Security’s cost of living adjustment—a fairly significant benefit cut. After huddling with his staff late Sunday morning, Reid told McConnell he had no more concessions to give.

Not long after, McConnell went to the Senate floor saying he had placed a call to Biden but hadn’t heard back. Sunday night, Reid’s staff went to bed aware that Biden had returned McConnell’s call but assuming nothing would come of it. “There was no indication [Biden] would engage,” says a Senate Democratic leadership aide close to the talks. Alas, it didn’t work out that way. Reid’s staff woke up Monday morning to discover that Biden had opened up his own negotiation with McConnell. The Republican leader had accepted a $450,000 income-tax threshold ($400,000 for individuals) and Biden was offering him a three-month delay of the sequester. (The eventual deal was a two-month delay.)

Reid was furious. In a call, he told the president that he or Biden would have to come to the Senate and pitch the deal to Democrats themselves--Reid wanted no part of it himself. But while other accounts have portrayed Reid’s frustration as stemming from the substance of the deal, Reid was just as frustrated over the fact that he'd been in the middle of executing his own plan, which was now moot.

According to the Senate aide, Reid believed that one of two things would happen if the negotiations were allowed to play out his way: Either McConnell, who obviously wanted a deal, would have come slinking back to him and basically accepted Reid’s last offer. “It would have been great if he called Biden and no one called him back,” says the leadership aide. “He would be so desperate for a deal that he took whatever he could get.” Or, less likely, McConnell would have thrown in the towel, allowing Reid to hold a vote on the Democratic fallback bill, which would have moved the income threshold back to $250,000 while extending unemployment insurance and a series of tax credits for the poor and middle class.

The latter might well have passed the Senate—Reid believed there were close to 60 votes for it—but would have been unlikely to pass the House, sending us over the cliff. In that case, Reid assumed the House GOP would have taken the blame, and that Republicans would rapidly soften up. Reid’s plan was to then work out another deal with McConnell that would have provided a small fig leaf—perhaps a slight rise in the income threshold above $250,000, but not close to $400,000 or $450,000—which would have likely passed on Saturday, January 5 (basically the soonest possible date). The aim was to pass this new bill with a large bipartisan majority (just as the eventual compromise did), thereby isolating the House GOP and forcing them to pass it too.

This may seem a bit far-fetched—how could Reid be so confident, after all? Obama, for one, worried that missing the cliff deadline could mean waiting for weeks if not months to resolve the situation. According to a senior White House official, the embarrassing failure of John Boehner’s “Plan B” meant the House might “never be able to act … and this would bleed into debt ceiling.” The official added: “Our hand is weakened on the debt ceiling if the economy is spiraling out of control and everyone’s taxes were up.”

But there were good reasons to believe the endgame would play out the way Reid envisioned. Reid’s model was the payroll tax cut fight of late 2011, when he and McConnell struck a deal to renew the tax cut for two months because they couldn’t agree on how to pay for a year-long extension. The deal passed the Senate overwhelmingly, at which point conservatives in the House revolted. For a day or two, the outcome looked uncertain—polls showed the public favored the tax cut, but the House had dug in. At that point, Obama suggested to Reid that they reopen the negotiations, but Reid, according to the Senate aide, told him, “Don’t you dare.” Democrats held the line, and the House GOP abruptly folded. When all was said and done, Democrats got an even better deal than they’d hoped for. The Republicans were so eager to put the episode behind them they dropped their insistence that the tax-cut extension be offset with spending cuts.

Long story short: Reid’s strategy would have at worst produced a slightly better deal than Biden negotiated had McConnell accepted his final offer before the cliff (a slightly lower threshold for the new top income tax rate and a one-year suspension of the sequester rather than a two-month suspension). At best it could have produced significantly more revenue (closer to a $300,000 threshold) had we briefly gone over. But Reid never got the chance to execute it. “Their guys were running around asking to be forced to vote for this so they could move on,” says the Senate aide of the GOP. “Everything Republicans were doing signaled weakness and desperation for a deal. Unfortunately, everything out of the White House did, too.”

It is, of course, important not to romanticize congressional Democrats here. Senate moderates didn’t exactly earn any glory during the last Bush tax cut fight in 2010. At the time, many were panicked about the idea of letting them lapse for anyone, even the wealthy, which massively complicated the administration’s efforts to phase out the tax cuts at higher income levels. The White House official argues that Reid’s cliff scenario would have hinged on Reid’s ability to hold Senate Democrats together this time around, too, which Team Obama considered an open question at best. Indeed, when Reid called Obama urging him not to take the Biden-McConnell deal, Obama was quick to ask what would happen if the House somehow passed a bill raising the threshold to $500,000—could Reid keep Senate Democrats from peeling off to support it? Reid insisted he could, but the White House was skeptical. (The White House official says that, during the December 28th meeting between the president and the top four congressional leaders, Reid even put a 500,000 income-tax threshold on the table. But aides to both Reid and Nancy Pelosi deny this.) 

Still, the Senate Democrats had actually shown surprising discipline this time around, having passed a bill in July that would have lowered the threshold to $250,000. There had been little wavering by individual senators since then—and none since the election. “No one more than us had come around to the idea that our political leverage was greater now,” says the Senate aide. “In 2010 we thought we were vulnerable in a million ways. In 2012, we did the ass-kicking.”

Whatever the case, allowing your adversary to decide who he’s going to negotiate with is a terrible precedent to set. The evidence suggests that McConnell got a better deal from Biden than he could have gotten from Reid. But even if you disagree, McConnell himself clearly believed this to be true. The lesson he surely took from the White House's sidelining of Reid is that Republicans will be rewarded with concessions if they hold out in the run-up to a deadline. With that in mind, McConnell will almost certainly repeat the exercise during the next round. And since, by the White House’s own accounting, failing to raise the debt limit would have far more serious economic consequences than going over the fiscal cliff, it’s hard to believe that the president will be in any position to call him on it.