Commentary | The Democrats have been handed quite a political opportunity with the Fiscal Cliff. No matter how things play out they’ve positioned themselves to look good in the eyes of the public or get what they want. This is what they call a win-win scenario and this is how I think the Democrat’s political strategy will play out.
In the past several years, President Obama has been quoted as saying that taxes should be not raised on anyone during a recession. This is a financially sound position that most economists would agree upon. Going further, Obama also said that if revenue was increased it should be done via reducing the number and types of tax deductions so that small businesses would not be harmed, which is what happens if you play with the highest marginal tax rate. Obama even formed a Budget Committee that came to the same conclusion. This also happens to be the Republicans plan for avoiding the fiscal cliff.
So why are Obama and the Democrats avoiding their own advice for being fiscally responsible? No matter what, the results of these budget decisions will be painful to the public. We either suffer pain now in smaller amounts over time or wait until the eventual financial meltdown that will hurt far worse all at once. But at the same time any moves to be fiscally responsible will be very unpopular with the United States public. No one wants to be the “bad guy” in this situation.
This is where political opportunism comes into play. Saying that the rich should be taxed more as part of their fair share sounds like a reasonable statement on the face of it, but in reality it amounts to political posturing. If Republicans give into Democratic demands the Democrats win. Taking this position has led to an artificial standoff where 53 percent of the US population believes Republicans should shoulder the blame if a fiscal cliff deal is not reached. Obama’s approval rating is already going up. Democratic supporters will be especially angry since Democratic states are projected to be hurt worse by the fiscal cliff. So the Democrats win either way. This standoff also gives Democrats an excuse to employ the nuclear option that will allow Senate Democrats to change the Senate rules for the filibuster in their favor (although they’d come to regret it if Republicans ever retake the Senate majority).
A truly reasonable Congress would automatically extend the Bush tax cats and then focus on hammering out a budget plan to gradually reduce spending until the deficit is gone and debt is being repaid at a reasonable rate. Unfortunately, many people rely on Congressional spending so for them to suddenly not spend around $1 trillion dollars would have immediate devastating effects.
So any budget plans will be implemented over time, although one is tempted to ask why spending cannot be decreased as quickly as spending increased? After all, when Republicans controlled both the House and Senate the deficit was in the hundreds of billions, only to jump to over $1 trillion after Democrats took control and began spending like crazy while revenue was slumping. In any case, conventional wisdom has governments reducing spending slowly as can be seen by the austerity measures in Britain. Finance Minister Osborne has the British economy projected to get rid of their budget deficit only by 2018.
While taxing the rich at a higher top marginal income tax rate sounds fair, this idea ignores the larger issues at play. Obama’s estimates have the rich tax only generating $160 billion a year, or $1.6 trillion over 10 years, in increased revenue. This assumes that the super-rich do not start fleeing the United States, like they are doing in Britain. The budget deficit, or the amount of overspending above the income, is estimated by the White House to be $1.33 trillion for 2012. That means the tax for the rich will only amount to a 12 percent dent in the real problem assuming Obama’s estimates are correct. As Arthur C. Brooks of the American Enterprise Institute has pointed out, “[e]ven if individuals earning more than $200,000 were taxed at a 100 percent marginal rate–and we confiscated their passports so they could not flee–the take would come to $1.27 trillion, or just 77 percent of [the 2011] deficit.” So why risk throwing the United States economy into a double-dip recession over such a minor part of any budget plan?
If the Bush tax cuts expire the stock markets will panic. But this panic can probably be partially averted from total disaster by immediately announcing plans to offer tax breaks. The Democrats also get to pick and choose who they reward with tax breaks. In this scenario Republicans will look like even worse bad guys if they don’t immediately agree. So once again Democrats win either way. Known pundits like Ann Coulter probably realize this so she’s advising Republicans to give up on this issue.
You might question whether Democrats are really planning on such a political strategy:
“If the Republicans will not agree with that [raising the highest tax bracket], we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year,” said Patty Murray, who was Democratic co-chair of last year’s deficit super-committee. “And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this.”
The next stage in the Democratic political strategy would involve the automatic sequester. If we go over the fiscal cliff, $1.2 trillion, or $133.33 billion over nine years, in automatic spending cuts will kick in, with half going to military defense cuts and the other half coming out of entitlement programs. In this scenario many people will be very upset by the sudden cuts to entitlement programs they’ve come to rely upon. Democrats can pressure Republicans to bring back the entitlement program spending. If Republicans refuse they look bad in the eyes of the public. So once again the Democrats win either way.
So at the end of the day the Democrats may have a situation where they control the Presidency and Senate, public opinion of Republicans is at an all-time low, military spending has been cut, entitlement spending has been restored, and taxes have increased tremendously by going from 18 to 24 percent of GDP. The 2011 GDP was $15.09 trillion so the taxes will be increased by around $905.4 billion assuming the economy doesn’t shrink (extremely unlikely).
Ignoring other factors like Obamacare increasing both spending and taxing, we can roughly estimate where this potential scenario leaves the annual Federal budget deficit. The Federal debt ceiling will likely be raised in February. Let’s assume that before spending cuts and taxes increases the 2013 deficit would be $1,330 billion, or $1.33 trillion, like in 2012. We can reduce this by $905.4 billion, which brings us to $424.6 billion in overspending. Half of the $133.33 automatic sequester is $66.65 billion, which brings us to $358.1 billion. To put this number in perspective when Bush was President and Republicans controlled both House and Senate the Federal deficit for fiscal year 2007 was $163 billion. So the worst news is that even after all the dust settles the Federal budget will still not be balanced unless further action is taken by Congress.
What do you think about this analysis of the Democrat’s political strategy? Do you think they’re purposefully setting the stage for going over the fiscal cliff or that stubborn Republicans are really to blame?