Trapped at the Bottom of the FIscal Cliff:The GOP's Gambit on Tax Cuts

By Jon Riley
The film 127 Hours is based on the true story of Aron Ralston, who got his arm caught under a immovable boulder at the bottom of a cliff while camping deep in the wilderness with no prospects of being rescued. Actor James Franco depicts Ralston's brave decision to saw off his own arm in order to free himself. The movie reminds me of the House Republicans' current predicament in the tax cut debate. The President is using this tax cut issue to pin the House GOP to the bottom of this fiscal cliff. Republicans should consider "pulling an Aron Ralston" by sawing off their commitment to tax cuts in order to save their remaining leverage.

Even the Tea Party hardliners who refused to go along with Boehner's concessions during the last debt ceiling debate now say they'll follow his lead on taxes. [1] Therefore, Boehner has the power to choose whether or not to compromise on tax rates and the sequester before we go off the fiscal cliff. Let's assume the President is serious about going off the fiscal cliff unless the Republicans allow tax cuts to expire for the top 2%.  We will compare two strategies Speaker Boehner could resort to if no deal is reached by January 1st: the "Total Doomsday" strategy and the "Tax Gambit" strategy.

Total Doomsday

The Total Doomsday strategy would be to do nothing in the face of the fiscal cliff. Tax cuts would expire for all Americans, and the sequester's harsh spending cuts would take effect. The country would endure this misery until February when the United States once again will face it's statutory debt limit. Then, the GOP would threaten to let the US default and the economy collapse unless Obama agreed to a deal on that reinstated tax cuts for all Americans, including the top 2%.

However, polls show that if taxes went up on everyone, Republicans would get the blame for holding middle class tax cuts hostage. [2] Moderate Republicans from swing districts would face intense public pressure to cave on tax rates, or else risk losing re-election. [3] Some have already defected. [4] If enough Congressional Republicans were to defect on tax rates, then all of a sudden it would be possible to pass a bipartisan compromise allowing tax rates to remain expired for the top 2%, extended tax cuts for 98%, resolving the sequester, and raising the debt limit with support from a majority of Democrats and a substantial minority of Republicans. In that case, Boehner would no longer be able to claim that a debt limit deal could only pass the House if it reinstated the tax cuts for everyone, and so he would be under enormous pressure to allow a vote on a bipartisan compromise that conceded on taxes, or else he'd be personally blamed for taking the crisis to the brink.

Tax Gambit

Alternatively, before we go over the cliff, Boehner could agree to extend taxes for 98% of Americans, but do nothing to resolve the sequester or the debt limit, then demand that tax cuts be reinstated for the to 2% as part of any final deal. If the GOP conceded on taxes, it would appear to the public that they had made such a large concession that they would be shielded from blame for the economic pain caused by the automatic spending cuts. Notice that Republicans would still be able to demand that tax cuts for the top 2% be re-instated as part of the negotiations over the sequester and the debt limit increase. But this time, since they chose to avoid all the bad press associated with raising middle class taxes, moderate swing-district Republicans would not face nearly as much public pressure to defect on this demand to reinstate all tax cuts. With a united Republican caucus standing strong on tax rates, Boehner could assert with much more credibility that the only debt limit increase that could pass the House would be one that at least partially reinstated tax cuts for the rich. President Obama would have to sign this bill or face default.

The only possible leverage the Republicans could gain by refusing to compromise on tax rates is that once it is time to reach a deal on the debt limit, in addition to threatening to let the US default, Republicans could also threaten to keep tax rates high for  a while longer. The tax hike threat becomes redundant -- like a super villain threatening to blow up the Earth twice instead of just once.

If no deal is reached by the first of the year, then Speaker Boehner's best alternative to a negotiated agreement is to extend tax rates for the bottom 98% now, but refuse to budge on anything else until the debt ceiling negotiations when he'll have more leverage. Obama has the Republicans pinned on taxes. It's gonna hurt quite a bit, but the GOP has no choice but to saw off it's own ideological stance on taxes in order to escape this fiscal cliff alive.