President Obama Is Using The Tax Increase For The Wealthy Issue To Divide The Republicans – The Goal Is To Gain Politically, And Not To Shape A Solid Agreement That Will Restore Fiscal Health

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By Paolo von Schirach

December 10, 2012

WASHINGTON – President Obama is not conducting a good faith tax and spending reform negotiation with Republican House Speaker John Boehner in order to avoid the “Fiscal Cliff” of draconian spending cuts (disproportionately defense cuts) and across the board tax increases.

Divide the Republicans

With his insistence that any deal has to include higher taxes on the wealthy, the President shows that he is primarily engaged in a clever political effort aimed at dividing the Republicans, an unruly bunch united only by their silly blanket pledge to oppose any and all new taxes. And he may actually win this critical battle because public opinion, rightly or wrongly, is on his side –that is the side favoring tax increases for the wealthy in the name of “fairness”.

Indeed why would Obama insist that no deal on real spending cuts (that have to include all the major entitlement programs) can be achieved, unless the Republicans capitulate on tax increases for the wealthy? Note that the President is not proposing a major tax policy overhaul that could include lowering rates in exchange for closing loopholes and special treatment for this or that group. He wants “the rich to pay more” because this is feel good policy, old fashioned populism.

Tax hike would not raise much revenue

If the President were really focused on substantive measured aimed at reducing the deficit, it is obvious that this tax hike would not be a top priority. Higher revenue coming from taxing America’s rich more would help only a little bit in reducing America’s huge annual deficits.

The projections are that these higher taxes would raise about $ 70 billion a year. Real money, for sure. But if you are serious about deficit reduction this would be of little help. $ 70 billion would be less than 10% of the deficit. In fact, this additional tax revenue would be enough to cover 9 days of annual federal spending.

So, if we agree that as a revenue increase measure this tax hike would not produce that much, why Obama’s unyielding assertion that there will be no deal unless he gets the Republicans to agree on it?

Good politics

Very simple. Because it is very good politics. All opinion polls indicate that large majorities (about 60%) believe that higher taxes for the rich are a good thing. Equally large majorities believe that if a deal to avoid the “Fiscal Cliff” cannot be reached because the House Republicans keep objecting to higher taxes for the rich, the public would hold the GOP responsible. If there is no agreement and we end up jumping off the dreaded “Fiscal C’liff”, it’s the GOP’s fault.

And here we see Obama’s strategy –a strategy that has little to do with providing leadership on how to fix public spending, so that Washington would convince the world and the bond markets that it is finally “bending the federal spending curve”.

Chance to gain politically

Obama has been re-elected. But he knows that his numbers were not that great. If recent history is any guidance, the Democrats will end up losing seats in the House and Senate in the 2014 mid-term elections. If that happened, after January 2015 Obama would be a spent force, an inconsequential President, prisoner of a hostile Republican Congress. So, the strategy is to exploit all the GOP weaknesses.

Obama knows that flat opposition to any revenue increase whatsoever is the only ideological glue holding Republicans of different stripes together. If some Republicans break away (they read the same polls) and decide to go with the President on tax increases for the wealthy Obama would have managed to divide the enemy camp, perhaps in an irreparable way, thus gaining more leverage later on.

On the other hand, if the GOP stays united and unyielding on the tax increase issue, then Obama can still say “no deal” without such an increase and blame the consequences on the Republicans. He is comforted by the fact that public opinion, at least on this, for now is squarely on his side.

Republicans created their vulnerability

Of course, Obama can use this tax issue, because the silly Republicans created it. And this shows the GOP inherent political weakness. If opposition to any and all new taxes is the essence of the Republican political message, it is a rather poor message. In fairness to them, it is true that this country just like most other advanced western industrial democracies, has a spending addiction problem. Higher taxes are required only because more spending is generated by politicians who want to give more “stuff”, so that they will get more votes. In this context, resisting pressures to raise more revenue at least in principle is not a character flaw.

That said, the Republican Party, if it wants to seriously compete in this political environment, has to be able to articulate a positive message of new things that will be done, as opposed to: “Fellow Americans, If we are in charge, we are going to cut all your favorite programs. And that just about sums up our entire platform“.

Still, even if President Obama is clever in exploiting this fundamental Republican political weakness, his behavior shows very clearly that he is not negotiating in good faith a fair deal aimed at restoring confidence in America’s public finances and in the political process that guides it.

Good politics, bad leadership

No, he is mostly interested in scoring a political victory. He realized that the Republicans are vulnerable on this issue, and so he wants to divide them, hopefully humiliate them. And, as I said, this may actually work. Owing to their own ideological stubbornness, the Republicans are vulnerable on this.

Still, as the elections are over and Obama won a second mandate, it would be good of him to stop campaigning and start governing by proposing a real spending and tax policy reform plan. But I am not sure that this President wants to lead and govern.

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