Republicans shift tone on taxing the rich

Some Republicans are shifting their tone on the prospect of increasing taxes on the wealthiest Americans, in a move that could ease concerns about the US plunging off the so-called “fiscal cliff” after the November election.

A senior Republican aide in the House of Representatives told the Financial Times there was an internal debate within the party, with one side arguing that Republicans would be better off to “give in” to Democratic demands for an increase in taxes for individuals making more than $250,000 if Barack Obama were re-elected.

“We’re not going to have that much leverage. We can try to leverage [the extension of Bush-era tax cuts for the wealthy], but you don’t want to use all your chips in the lame duck. You want to use them for actual, real legislation,” the House aide said. “You might actually give in on $250,000. I don’t know how, but you might.”

A top Republican aide in the Senate said that an overhaul of the US tax code was ultimately the most important tax-related goal of the party and that the intense focus on whether or not to increase taxes on the top earners was ultimately irrelevant.

The quietly changing sentiment diminishes the chances of the US dropping off the “fiscal cliff” in early 2013. Unless Congress takes action, the economy will be hit by a $600bn combination of tax hikes and spending cuts that are forecast to tip the country into a double-dip recession in the first months of next year.

Among the most dangerous scenarios is one in which Mr Obama is re-elected, and Republicans maintain control of the House, and possibly take over the Senate – with each side claimed an electoral mandate for their position on hiking taxes on the rich, leading to a stand-off.

But if Republicans back away from their hard line on high-end tax cuts, the outlook for avoiding the worst of the fiscal cliff is much rosier.

Some Democrats are taking notice. Chuck Schumer, the senior Democratic senator from New York, said in a statement to the FT: “For the first time in 30 years, Democrats have the upper hand on the handling of the tax issue. Given the outlook in the presidential race, Republicans are slowly adjusting to the reality that they will have to compromise on revenues after November.”

The first sign that a shift was under way came during the Republican convention in Tampa, when one of the party’s top donors, David Koch, said in an interview with Politico, the Washington news website, that achieving spending reductions in the US budget was “maybe going to require some tax increases”.

Later last month, Tom Cole, a House Republican from Oklahoma on the budget committee, described the election as “a referendum on taxes”, saying an Obama victory would mean higher taxes on the wealthy and “there’s not a lot we can do about it”, according to the Washington Post.

The change in tone has also been evident on the campaign trail, where Mitt Romney has recently taken the position that his administration was not seeking to cut taxes for the rich, even though the Republican nominee had during the primary contest touted his plan as cutting all Americans’ taxes by 20 per cent.

According to the latest NBC/Wall Street Journal poll taken in late September, Mr Obama had an edge over Mr Romney of 46 per cent to 41 per cent on “dealing with taxes”, compared with a narrower two percentage point advantage in July.

However, in the wake of Mr Obama’s poor showing in last Wednesday’s debate – and Mr Romney regaining ground both nationally and in several swing states, according to the latest polls, many Republicans are becoming more confident that they could recapture the White House.

In that case, Republicans are expected to hold firm in their demands for all Bush-era tax cuts, including on the wealthy, be extended temporarily to give time for the new administration and Congress to craft a broader tax reform deal. It is unlikely that a defeated Mr Obama or congressional Democrats would stand in the way of that, which also would bolster the odds of the US handling the looming fiscal cliff in a relatively orderly manner.

But for now Mr Obama remains the favourite – at least inside Washington – and Republicans are thinking ahead. “If the status quo results [from the election] the question for Republicans is: can we make a symbolic capitulation on revenue but tie it to tax reform and resolution of the sequester [including automatic spending cuts to the defence budget, which Republicans want to protect]?,” says Helen Fessenden, a US policy analyst at the Eurasia Group.

Pressure from business groups on Republican groups to cave and avoid the fiscal cliff may also play a role. But a deal may not come quite as easily as allowing the Bush tax cuts for those with annual income above $250,000 to run out, however. Instead, it might involve curbing tax deductions or exemptions for the rich, or lifting the threshold to $500,000 or even $1m in annual income.