If Obama “folds” by agreeing to extend tax cut for the top 2% and the Republicans refuse to compromise (“don’t fold”), then the Republicans win. If the GOP “folds” by agreeing to extend tax cuts only for 98% of Americans and Obama doesn’t “fold”, then Obama wins. Either of these two scenarios would avoid the fiscal cliff. But if neither side gives in, then we go over the fiscal cliff: the Bush tax cuts expire for all Americans and deep spending cuts begin to take effect. At that point, we would replay this same game of chicken every day until a deal is struck. And with every day that passes without either side folding, the economy is is further weakened and more Americans begin looking for someone to blame.
As of now, it appears that the Republicans would get the blame: according to a recent Washington Post/Pew poll, 53% of Americans said they would blame the Republicans if we went over the fiscal cliff, while only 27% said they would blame Obama. Assuming this is true, then every day after January first voters would grow more and more angry at Congressional Republicans for continuing to hold middle class taxes hostage for the sake of extending tax breaks for the top 2%. Eventually the Republicans will have to cave.
Even if Obama believes he will win on taxes after we go over the cliff, he would still prefer to get a deal done now to avoid the economic pain. Thus, Republicans have some leverage to demand serious spending cuts in exchange for tax increases as long as they act before January 1st. Since Republicans know that they will eventually have to fold once taxes on everyone go up, why wouldn’t they just give in now while they have the leverage to demand something in return?
The answer is the Grover Norquist tax pledge. If Republican Congressmen voted to increase taxes on the top 2% before January 1st, then they would be violating their pledge to never raise taxes. This would make them vulnerable to a primary challenge from the right. But after January 1st, everyone’s taxes will automatically go up, and so at that point, voting to reinstate the tax cuts for 98% of Americans would be considered a tax cut, which would not violate the Norquist pledge. Therefore, the Republicans' no-tax pledge may turn out to hinder them strategically in these particular tax negotiations by preventing them from making a deal while they still have some leverage, and then becoming inapplicable once we go over the cliff and a deal must be reached.
Unless there is a major change in the structure of this game, we are likely to go over the cliff for at least a short period of time, after which the Republicans will end up agreeing to give Obama most of what he wants on taxes.
