The framework would have to be specific and enforceable to make it stick. This would include targets for revenue, an agreement on the top income-tax rate for individuals, and an understanding by both parties about how progressive the tax code should be. A framework must also include a penalty—something like sequestration—for failing to follow through. (Otherwise, Washington could keep punting for years.)
Under this scenario, lame-duck negotiators could quickly nail down some cheaper pieces of business: a patch that prevents the alternative minimum tax from hitting the middle class, the annual Medicare “doc fix,” and corporate tax-break extensions to appease the business community. Behind the scenes, some congressional staffers in both parties have also been working on a plan to temporarily undo the sequester’s most immediate $109 billion in cuts by offering up a down payment of $55 billion in savings.
Then the hard work of constructing a grand bargain would begin. In an interview with the Des Moines Register, Obama declared an opening position during his campaign: He wants $1 in revenue for every $2.50 in spending cuts. The term “revenue” is key. “The administration has been clear that they’re open in getting additional revenue from people at the top by ways other than raising the top rate,” Kamin says. “But if you agree to a top rate that is too low, it will be extraordinarily difficult to enact legislation that achieves your revenue goals by broadening the base, simply because cutting some of those tax expenditures may prove to be politically impossible.”
Republicans so far profess an open mind on “revenue,” which could allow a larger and more lasting deficit-reduction pathway: tax reform. Congressional Republicans and administration officials have all said in the last year that they want it. “By working together and creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy,” Boehner said at a press conference on Wednesday. “A stronger economy means more revenue, which is what the president seeks. Because the American people expect us to find common ground, we are willing to accept some additional revenues via tax reform.”
Politically, this scenario behooves everyone, since it casts Congress and the White House as partners willing to engage in a major budget overhaul in 2013. It is still, however, the less likely outcome.
The far more likely scenario for both parties is a swan dive over the fiscal cliff. The election gave Obama some leverage, especially since the Democrats retained control of the Senate. But House Republicans also kept their majority. Both parties view the status quo as an affirmation of their power. “The president feels like his mandate from a slim margin of victory is to raise taxes,” says a Republican Senate aide privy to GOP discussions. “A razor-thin margin will not change the principles of the Republicans.”
A plunge would follow weeks of behind-the-scenes negotiations, public political posturing, and pressure from outside groups—both political and business ones. And it would surely shake the nation’s confidence. But it might not be all bad.
True, from an economic standpoint, it would turn deficit reduction into a de facto program of austerity, just as the unemployment rate is sinking and the economy is recovering. But from a purely political standpoint, the cliff dive would allow lawmakers to negotiate with a clean slate. Neither party likes a recession per se, but they may both dislike one less than they dislike surrendering their entrenched tax positions.
The fresh start would allow Republicans and Democrats to cut a deal appealing to both parties. As soon as the Republicans reinstated a majority of the 2001 and 2003 tax cuts, they could sell it to their base as a huge windfall: They succeeded in cutting taxes! They could also nudge the Democrats to tweak entitlement programs such as Medicare and potentially Social Security—another selling point with the GOP base. (Democrats may agree to some changes there, but they will be most reluctant to cut programs for the poor, such as Medicaid and food stamps.)
Similarly, the Democrats could use the fiscal-cliff jump as a way to enact Obama’s campaign promises to tax top earners. The Republicans would have to agree to an increase in revenues—not just from future economic growth—and this, in turn, would allow Democrats to say they had fulfilled their campaign pledge and helped to level the playing field.
It’s even possible that, if both parties concoct a deal quickly, they can mitigate the economic effects. But a prolonged battle (during which the spending cuts and tax hikes stay in place) would enervate the economy and sap the confidence of consumers, businesses, creditors, and other countries.
It’s hard to see the route to a quick deal—especially one before the New Year’s deadline—because the players remain the same and the party lines are as extreme as ever. The president did call all four congressional leaders after the election to talk about the fiscal cliff; Obama, Boehner, and Reid spoke this week in a much friendlier tone than they have in the past about the need to compromise. But the substance has not shifted at all since the failed super committee and the epic battle in 2011 over the debt ceiling.
Pabulum about open-mindedness and summits at Camp David will not unify the parties over the next six weeks. Which may mean one thing: a jump over the cliff into the great unknown that hopefully sometime produces a compromise.
This article appeared in print as "Game of Chicken."
This article appears in the Nov. 10, 2012, edition of National Journal.