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Obama Should Give Up On Revenue And Sign An All-Cuts Deal

The news that Republicans are demanding that the expiration of the individual mandate be used as a trigger to require tax reform does not necessarily tell us what will be in the final agreement. But it does convey one vital piece of information -- namely, the negotiating price of getting Republicans to accept tax hikes is simply too high.

Anti-tax theology is the core of the modern Republican Party. If the GOP leadership cuts a deal that includes higher taxes, that deal will either exert an unbearable price in return or provoke a conservative revolt that kills it, or possibly both. Meanwhile, the Bush tax cuts expire at the end of 2012, and Obama has no need to raise revenue before then. (Indeed, he'd rather postpone any revenue increases until the economy has recovered.) What's more, as Paul Krugman notes, it's a fantasy to assume that any Grand Bargain would bind Republicans should they regain a working majority. If Obama wins the election, the Bush tax cuts on the rich will expire (and then he can negotiate a tax reform from a position of strength.) If Republicans win, they'll pass a big tax cut for the rich, because that's what Republicans do. Either way, getting agreement on a tax hike on the rich right now won't matter.

The incentive Obama has to negotiate on revenue is to get higher revenue on the non-rich. Obama promised during his campaign to avoid tax hikes on income under $250,000, but the fiscal deterioration resulting from the economic collapse has made that untenable, even after the economy recovers. If Republicans will give him cover to get around that pledge, by supporting a tax reform that eliminates subsidies that are regressive but don't exclusively benefit the very rich, then that's worth trading some entitlement cuts for. (The gang of Six Plan does this.) If he can't get more out of them then he'd get by vetoing the extension of the Bush tax cuts on the rich, he's not getting anything worthwhile. Indeed, he's making dear negotiating concessions to obtain something of little value.

And, of course, there are lots of other things Obama wants out of these negotiations. protection for domestic discretionary programs he especially supports. Backloaded cuts that don't impose a fiscal drag while the economy is struggling. A temporary payroll tax cut, unemployment benefits, or other forms of stimulus. The point is, not putting Republicans in a position to accede to tax cuts would give Obama enormous leverage over other aspects of the deal. That's where he should invest his energies.

An all-cuts deal sounds bad, but it contains some real advantages. It clearly positions Obama in the center, and assuages centrist fears that he's a big government liberal (fears I don't share, but the political power of which I concede.) It makes a large step toward medium-term fiscal correction without taking the choices off the table. Having taken a large step, voters in 2012 will decide the next one -- higher taxes on the rich, or deep cuts to Medicare and Medicaid? That's a good set-up for Obama. If he think he can "take the deficit issue off the table," then he's also taking off the table the priority contrast that offers the strongest basis for his reelection. And he ensures the discussion moves off of priorities and onto the state of the economy, which is a discussion he's likely to lose.