By Kasra Kangarloo

WASHINGTON (MNI) – With the first round of budget talks between the White
House and senior congressional leaders underway Friday, one thing about
President Barack Obama’s stance is clear: the Bush-era tax cuts for upper income
Americans are key.

During a press conference Wednesday, the president was as explicit as he
could possibly be: “What I’m not going to do is to extend the Bush tax cuts for
the wealthiest 2%.”

Several times he repeated this claim, largely because reporters, seemingly
unconvinced, kept asking about it. These were, after all, surprisingly blunt
words from a President known for shying away from conflict, and for at times
employing wordy lawerly explanations when responding to the simplest questions.

One question, perfectly captured the air of skepticism in the room: “Mr.
President, on the fiscal cliff, two years ago, sir, you said that you wouldn’t
extend the Bush-era tax cuts, but at the end of the day, you did. So,
respectfully, sir, why should the American people and the Republicans believe
that you won’t cave again this time?”

Obama’s answer was pure economics: the economy was worse in 2010, and there
were more important matters, such as the payroll tax cut and unemployment
insurance, to be considered.

It is correct, of course, that the economy has improved: unemployment has
ticked below 8.0%, the housing market is finally showing signs of life, and
manufacturing continues to hum along. By the time talks with Hill leaders
started in 2010, the unemployment rate was still bouncing around 9.5%.

But that recovery certainly will be jeopardized by the impact of the
combined “fiscal cliff” effects in 2013 if all the scheduled tightening is
enacted.

According to a study by the Congressional Budget Office, the expiration of
the Bush tax cuts could cost the economy 1.5 points of GDP over the course of
the year, while slated cuts to defense and non-defense spending, in accordance
with the Budget Act of 2011, would deduct another 0.75 points.

Additional tightening — expiration of both the payroll tax cut and
emergency unemployment insurance — would deduct yet another 0.75 points,
putting the total contraction at just under 3.0. Given that average GDP growth
was 1.76% in the first three quarters of 2012, this would almost certainly put
the country back into recession.

A study by Goldman Sachs, meanwhile, finds that the impact of the expiring
payroll tax cut alone could shave 0.6 points from GDP in 2013, effectively
cancelling out the benefits of the Federal Reserve’s third round of asset
purchases.

Obama was not shy during the press conference about the economic effects of
“going over the cliff,” warning that holiday shopping would likely take a hit
and businesses would suffer as a result, and “we could go into recession.”

But the fact remains that, despite the potential effects, the stakes for
the Democrats are less about economics and more about leverage, and the ability
of the party to break the GOP’s firewall on tax hikes for the richest Americans.

Obama’s gambit, as he described during the press conference, is essentially
this: if Republicans can agree to keep the Bush-era tax cuts in place only for
the middle class — those making less than $250,000 a year — passing them as a
separate bill, then the rest of the budget negotiations should be relatively
straight forward.

And the President has said entitlement changes are on the table, something
Republicans surely will insist on.

Additional revenue can be found through comprehensive reform of the tax
code, which House Speaker John Boehner has already put forward, in exchange for
some spending cuts and changes to Medicare, which Obama has said he is willing
to support.

But the basic contours of the conflict remain the same: Republicans are
still holding the line on their anti-tax pledge, while Democrats have verbally
conceded to nearly every Republican demand, with the exception of having the
richest Americans pay higher tax rates.

During his first public statement after the election, Boehner said new
“revenues,” derived from changes to the tax code, would be acceptable, while
“raising rates” is still unacceptable.

The debt ceiling talks in 2011, grueling and protracted as they were,
played on the very same riff.

Obama sought the same concession from Republicans – higher tax rates on
upper-income earners – and offered more and more in budget cuts until a final
package consisted of $10 in cuts for every $1 in new tax revenue. The House
still rejected the deal, leading to a collapse of the talks and the specter
default on U.S. debt.

Raising taxes on the wealthiest Americans was, in many ways, the chimera of
the whole budget saga.

The cuts eluded Obama time and again, finally culminating in the failure of
the debt ceiling talks, what is widely considered the low-point of his
presidency. His approval rating dipped into the 30s, and the economy slumped off
the shock in confidence, all while the Republicans had forced him to a $1
trillion in spending cuts without a dime of new revenue.

In many ways, this battle had been lost before it was fought, to paraphrase
Sun Tzu’s “The Art of War.”

The Tea Party caucus that roared to power in the 2010 midterms amid public
discontent over the deficit gave Republican leaders enough leverage to demand
near complete capitulation to its demand, which Boehner first described in a
speech in New York in May 2011, that the debt ceiling would only be increased by
an amount equal to cuts made to the federal budget.

This kind of ultimatum was historically unprecedented. All too often the
situation has been described as one in which the parties repeatedly failed to
reach agreement, as if both sides were equally unwilling to compromise.

But the grim reality is that one party made the political calculation to
withhold cooperation unless every one of its demands were met, while the other
desperately sought to appease them for fear the responsibility for any economic
calamity would be born by the party in power.

This made the very act of achieving the debt ceiling increase, in exchange
for the formation of super committees charged with creating a debt-reduction
package, and in spite of a number of Tea Party House members openly rooting for
default, a victory for the president in itself.

On the surface, there are few material differences between Obama’s position
presently and during the failed budget talks of 2011. Republicans still hold the
House of Representatives, Democrats still hold the Senate, and Obama holds the
power to veto any legislation that comes across his desk.

The key difference may simply be the sense in the administration that the
president finally has the political leverage to potentially allow the tax cuts
to expire and, more implicitly, to allow a degree of economic pain in order to
pressure the Republican party into accepting the president’s terms for a
substantial, long-term solution to the nation’s soaring deficits.

He suggest as much in Wednesday’s press conference: “I think every voter
out there understood that (the tax cut debate) was an important debate, and the
majority of voters agreed with me,” Obama said.

It may also be that those tax cuts for upper income earners, after a year’s
worth of failed talks and continued support from a large majority of Americans,
are simply politically unacceptable, no matter the cost of putting them to bed.

The politics of the electorate, at least, seem to favor the president.

Exit polls following the presidential election showed 60% of Americans
favored raising taxes on the rich, while a recent Pew Research/Washington Post
survey showed that 53% of the population would blame Republicans for a failure
to reach a deal, versus only 29% for Obama.

There are no guarantees the economy won’t take a hit even if Obama can
successfully push Republicans into accepting a tax hike on the wealthiest
Americans.

Raising tax rates on the top 2% of earners would bring in close to $1
trillion over 10 years, still short of Obama’s goal of $1.6 trillion in new
revenue. This, combined with the looming debt ceiling early next year, gives
Republicans plenty of leverage as well.

This could make for another long series of confidence-shattering standoffs,
and the economy could still take a tumble.

For his part, Senate Minority Leader Mitch McConnell has shown no signs of
backing down, declaring on the Senate floor Thursday that “an opening bid of
$1.6 trillion in new tax hikes isn’t serious, it’s a joke.”

-Kasra Kangarloo is a reporter for Need to Know News

** MNI Washington Bureau: (202) 371-2121 **

–email: dcoffice@mni-news.com

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