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December 3, 2012 7:53 pm
The prospect of diving off the fiscal cliff is looking increasingly likely with the White House and Republican leaders on Capitol Hill at loggerheads over how far new taxes and spending cuts should go to correct the nation’s long term fiscal problems.
All sides of the political debate have publicly said that such an impasse, which would mean automatic tax increases on all Americans and deep cuts in government spending as of January 1, risked a possible recession and was unacceptable.
But Democrats believe President Barack Obama is far more resolute than in past dealings with Republican leader John Boehner, when the president was regarded as a pushover in past dealings, and is now willing if pressed to see tax rates rise on all Americans in the new year – at least temporarily – instead of agreeing a deal that does not meet his demands.
Indeed, the tougher question being debated among Washington insiders now is not whether Mr Obama would be willing to dive over the cliff if Republicans were staunchly opposed to any tax rate increases. Most say he would.
The issue is whether he would be equally opposed to a compromise in which Republicans made some concessions without agreeing on his broader set of goals.
“There is just a point in life, after the election, when you have had people throw everything they could at you and you’ve not only survived but thrived when you say ‘enough is enough,’” says Andy Stern, the former labour leader.
Mr Stern says a “small” deal – one that would raise $700bn in revenue – would prolong the broader fiscal problems and continue to haunt Mr Obama and his second term.
While Republicans fear they will primarily be blamed for failure to reach a deal, Mr Obama might be hurt politically if he rejects an offer that is seen as reasonable but too small. But it is a risk he might be willing to take.
“He will never have better leverage than he has right now,” Mr Stern says.
Charlie Cook, the political analyst, says the White House and Republicans will probably agree a deal to avoid part of the fiscal cliff, the sequester that automatically cuts $1.2tn from the budget including $600bn from the Pentagon.
The White House and Congressional leaders are embarking on high-stakes talks to avoid a looming fiscal cliff
But he believes leaders will fail to reach a deal on taxes and that rates will therefore increase for all Americans, because Democrats will remain as intransigent on protecting popular government programmes from cuts as Republicans will be on tax rate increases.
“For Boehner to do what he wants to do, the knuckle-draggers have to be absolutely terrified. And they are not terrified,” he says, using the term Mr Boehner himself once used to describe Tea Party Republicans. “If you get rates up on December 31, they and their constituents will be screaming bloody murder and begging for a deal.”
Republicans last week balked at the White House’s initial list of demands, including an increase in the US borrowing limit, $1.6tn in new tax revenue and between $400bn and $600bn in spending cuts, given conservatives’ demands for far greater cuts in spending and no increases on tax rates.
Republicans believe that Mr Obama and Democrats will ultimately be forced to bend and agree a deal that essentially abandons most of their big demands for tax hikes. This is predicated on the view that Mr Obama is not prepared to allow the country to possibly slide into another recession and see taxes increase on all Americans, even temporarily.
Keith Hennessey, a former Bush administration official, argued last week in a blog post that Mr Obama was “bluffing” when he said he would not support a deal that did not increase tax rates for the wealthy. Even if Republicans were blamed for the recession that ensued, he argued that Mr Obama would not risk all the other goals of his second term.
A decision to forgo a deal, Mr Hennessey said, was not just about fiscal policy.
“It’s about whether the President wants to cause a recession in 2013 and hamstring his second term. No matter what he or his advisers say, he cannot afford to take that risk,” he wrote.
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