The Next Game of Economic Chicken: Not on the Deficit But Over Taxing the Rich

With the election behind us I had hoped we’d get beyond games of chicken. No such luck.

But first you need to understand that the game of chicken isn’t about how much or when we cut the budget deficit. Or even whether the upcoming “fiscal cliff” poses a danger to the economy.

The non-partisan Congressional Budget Office on Thursday warned that the automatic tax increases and spending cuts scheduled to start in January amount to too much deficit reduction, too soon. They’d put the economy back into recession, and push unemployment to about 9 percent. But the CBO also warned of an economic crisis ahead if the United States doesn’t stem the growth of the nation’s exploding deficit.

Get it? Reduce the budget deficit too quickly, and we’re in trouble. But fail to address the deficit, and we’re also in trouble.  It’s really a matter of timing. That’s why I think any deal should include a trigger mechanism that begins to cut spending and raise taxes when the economy has two consecutive quarters of 6 percent unemployment or less, and 3 percent annualized growth or more.

In reality, though, the upcoming game of chicken isn’t about any of this. It’s over the clearest issue President Obama and Mitt Romney fought over: whether taxes should be raised on the rich.

Democrats and Republicans are now maneuvering to maximize their bargaining leverage when they sit down next year to decide this.

On Friday the President called on called on Congress to immediately make permanent the tax cuts for Americans who make less than $250,000 a year, while at the same time allowing tax rates to rise for wealthy Americans — and then making those rates part of a broader deal next year.

The President knows congressional Republicans won’t agree, but he needed to set out his central demand because it’s the one thing that can fairly be interpreted as a mandate from the election.

So what’s going to happen? Bear with me, because this gets interesting.

Some Democrats (and some White House strategists) figure they’ll have most bargaining leverage in next year’s deal if they do nothing now – allowing tax rates to rise automatically on everyone after the first of the year. Then they plan to offer Republicans a deal that reduces taxes on people earning less than $250,000 – which would be retroactive to January 1st.

Republicans would have to choose between a tax cut on the middle class or no tax cut at all. Democrats believe Republicans would have to take the deal. Even Grover Norquist would be hard-pressed to come up with an argument against it.

Some Republicans, meanwhile, figure they’ll have more bargaining leverage if they keep things as they are until late January or February.

What’s magical about late January and February? That’s when the debt ceiling has to be raised again, which means that’s when Republicans can once again threaten to vote against raising it. (In theory, we’ll hit the ceiling at the start of January, but the government can juggle payments and take various “extraordinary measures” for another month or two beyond that – maybe even until March – before it could no longer be able to borrow enough money to pay its bills.)

This is the thinking behind House Speaker John Boehner’s proposal earlier Friday that all the tax cuts — including those for the rich — should be extended until next year, until there’s a deal. “I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us,’’ Boehner said.

So who blinks first? Democrats who don’t mind going over the cliff because they’ll get a better final deal – and the deal will be retroactive to January 1st so it’s not really a cliff at all but more like a little hill? Or Republicans who want to extend the Bush tax cuts beyond January 1st, until we get sufficiently close to the debt ceiling that they can once again threaten the full faith and credit of America?

As I said before, I had naively assumed the election would put an end to these games, but obviously not. Yet Obama and the Democrats are holding most of the cards now. Let’s hope they use them.

This post was originally published at Robert Reich.org and is reproduced here with permission.

4 Responses to "The Next Game of Economic Chicken: Not on the Deficit But Over Taxing the Rich"

  1. Bob   November 12, 2012 at 10:59 am

    Boehner is making it clear that he wants tax cuts maintained for everyone including of course the rich. Obama pretends that he is making it clear he does not want the cuts extended for the rich. But if you read more carefully what he says, he says he want the rich to pay more.
    Paying more could be 1 dime more. So Obama needs to be pressured to say he really means that the cuts should not be extended for the rich. Otherwise a compromise will be struck in which some meaningless increase at some time in the future for the rich will be made. The wealthy will have played good cop bad cop and have gotten what they want.

  2. Bob   November 12, 2012 at 6:23 pm

    I am surprised there is not a lot more discussion on this blog. Trolls seem to write a lot but not a lot of discussion

  3. Earl Grinols   November 13, 2012 at 9:45 am

    Does not the 14th Amendment, part 4 guarantee that failure to raise the debt limit does NOT "threaten the full faith and credit of America?" What exactly does the term mean, "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. "

    I was always taught that a Constitution limits the majority. Hence Congress may not "threaten the full faith and credit of America" merely by failing to extend the debt ceiling.

  4. Jpam   November 13, 2012 at 8:52 pm

    So I did a little math over the past few days to see the effect on my family's income after tax of Mr. Obama's . While I admit 2 professionals with pay around 200k each in NYC probably are among the top 1 percent. I was quite surprised at my final marginal rate when I include NY and NYC taxes….58.3%. Stunning amount of tax at the margin for sure. So I looked around my budget. I could curtail all savings to make up for the difference, put my kids in the public schools, or just take it out of charity. Charitable contributions amount to 6.7% of our gross income. Almost exactly the amount the Obama administration wants . So for me charitables will be the cuts to pay Obama's fair share. It makes sense really when you think about it. The government is taking more from me to pay for bills others incur….in effect it is taking the place of charity albeit with significant inefficiency. Though I hold charity in high esteem I also realize that with social security and Medicare likely to be means tested and the quality of most new York public schools as abysmal as they are, I really have no choice. But I want to thank the democrats for helping illeviate the guilt this believer in judeo Christian values has over this.