Obama’s Fiscal Cliff Game Plan: Let’s Make a Deal
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The Fiscal Times
November 7, 2012

A victorious President Obama will return to the White House for his second term with a strengthened hand to pursue his centrist agenda with a divided Congress.

While the Republican House majority may continue to oppose Obama’s initiatives, the legislative calendar now works in the president’s favor. The first test will come over the next several weeks as Congress wrestles with the fiscal cliff, the already legislated set of tax increases and spending cuts that could yank a half trillion dollars out of next year’s economy and throw the nation back into recession.

If the House, where Republicans lost 7 seats from their solidly conservative majority, refuses to compromise on raising taxes on upper-income households, the president can simply allow the tax cuts enacted in 2001 and 2003 to expire. The nation will then return to the tax rates in effect when Bill Clinton was president, a time when the nation enjoyed its greatest job creation spree of the past three decades while generating budget surpluses.

The still fragile economy is in a very different place today, of course. Most economists believe tax hikes of that magnitude will trigger renewed recession, as it largely eliminates the ten-year deficit that the president listed as his number one priority during his early morning victory speech to the huge throng in Chicago’s McCormick Place.

But the president has the power to delay implementation of the new tax withholding tables for months as Congress and the White House work on a tax reform package that cuts everyone’s tax rates. In essence, allowing the Bush-era tax cuts to expire creates room for the tax reform program modeled on the proposal of the defeated Republican candidate Mitt Romney, only from a higher tax base.

The same dynamic will play out on the spending side. Only the progressive left and libertarian right back the magnitude of the Pentagon budget cuts contained in sequestration – the across-the-board spending reductions enacted as part of the August 2011 debt ceiling deal. The president can seize the high ground by offering to restore most of the new military cuts in exchange for more modest spending cuts in domestic programs. Adjustments could be made in the size of the tax cuts or the pace of deficit reduction to accommodate that strategy.

Washington’s permanent government – the small army of lobbyists that populate K Street – will take care of the rest. Physicians and the American Medical Association will take up arms against the Medicare pay cuts and every business lobbying group in Washington will clamor for restoring their special tax breaks – the so-called extenders like credits for research and development. Or, the extenders will become bargaining chips in a tax reform deal that lowers overall corporate rates – a major objective for corporate lobbyists.

With nearly $4 trillion in new revenue over the next ten years to play with, Congress shouldn’t have trouble coming up with the money needed to reform the corporate code and make the “doc fix.” The same holds true for preventing the alternative minimum tax from hitting tens of millions of middle-class Americans. There appears to be a broad consensus for eliminating the payroll tax cut that kept the recovery on track over the past two years, which further reduces the amount of deficit reduction needed from other measures.

Beyond dealing with the fiscal cliff, Obama will not need much from Congress in the first half of his second term. If Republicans want to fight him on immigration reform, his third-ranked priority in his victory night speech, they risk further alienating the fastest growing minority in American politics, which gave Obama surprising victories in swing states like Colorado, Virginia and Florida.

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.