What If The Republicans Embrace The Fiscal Cliff?

There is a common misconception in Washington that the House Republicans, battered after their election losses in November and fearing blame for allowing the nation to go off the fiscal cliff will cave before President Obama’s demands for tax rate and spending increases. At best, it is asserted, the Republicans might be able to salve their wounds with the administration’s promise to consider comprehensive tax reform next year, although there is no reason to believe that having won this round the Democrats will feel any need to adopt Republican ideas on this subject. As the President remarked to Rep. Eric Cantor during the 2009 discussions on reducing the federal debt “I won.”

It may be that the Republicans are in a better strategic position than conventional wisdom recognizes should the President take us over the fiscal cliff. After that, the Republicans have options both with respect to taxes and spending cuts. So, on January 2, the first thing the House should do is introduce a bill sponsored by the entire caucus to restore the so-called middle class tax cut as well as the prior rates of taxation on dividends and interest income. How can the President and Congressional Democrats not agree? Yes, taxes will rise on the top 2 percent, including small businesses. However, this will enshrine a top limit for federal income taxes on 98 percent of Americans. The resurrected tax rates will no longer be labeled the Bush tax cuts; they will be bipartisan tax rates. This will take the political sting out of the fiscal cliff and could avert the feared “double dip” recession. If the administration wants any more revenues it will have to engage in comprehensive tax reform discussions.

At the same time, the Republicans have options on the spending side. They can do nothing, thereby allowing the first real reduction in federal spending in generations to go forward. Not bad. Or they continue to pursue the Boehner proposal to protect defense spending, already reduced by more than $480 billion based on the Budget Control Act, taking deeper cuts in other parts of the federal budget.

The problem for Republicans is that they have no maneuver room, no options prior to going over the fiscal cliff. If they don’t cave in to the President’s demands they will be accused of increasing taxes on the middle class and creating the conditions for a new recession. Moreover, they will not get any credit for having given in. In fact, if the House Republicans do acquiesce to the President’s demands they will face a backlash from their own erstwhile supporters.

Once they take the plunge, room for real negotiations will exist. They can negotiate on a range of tax issues. They can do puts and takes on spending. They could offer to extend the payroll tax cut and put in place the Alternative Minimum Tax patch in return for additional cuts in spending. In addition, there is the looming requirement to raise the debt ceiling in the Spring.

An axiom of strategy is not to fight on a battlefield chosen by ones opponent. The lame duck session is the President’s preferred place to have the tax and spend fight. This means that Speaker Boehner, Minority Leader McConnell and the Republicans must move to an alternate field of battle – which is January 1, 2013.