Fiscal Cliffhanger
The GOP’s goal is clear: no permanent tax increase without tax and entitlement reforms.

Central fiscal-cliff players Harry Reid and John Boehner


James C. Capretta

House Republicans left town in disarray on the evening of Thursday, December 21, after rejecting Speaker John Boehner’s “Plan B.” That bill would have avoided the tax cliff in January even as it allowed tax rates to rise for millionaires. (A separate bill, which did pass the House, would turn off the “sequester” as it applies to the defense budget.) If Plan B had passed, House Republicans could have told their constituents that they had approved a bill to prevent a massive 2013 tax hike on most taxpayers even as they acceded to the president’s demand to raise taxes on the rich. With Plan B in hand, Boehner would have been in a much more favorable position to negotiate with Senate majority leader Harry Reid over a possible final compromise.

Alas, it was not to be, for reasons that remain hard to fathom. It is certainly understandable that House Republicans want to avoid voting to raise taxes. But they must know that they are about to get a whopping, and probably irreversible, tax increase forced on their constituents in part because of their unwillingness to demonstrate any tactical agility in this difficult struggle. After Thursday night, the tax bill that will ultimately get handed off to American households has almost certainly gone up rather than down.

Still, one should not assume that last week’s debacle is the end of the Republican participation in this saga. Legislation cannot make it through the Senate or the House without some level of Republican support. So the question is, What should Republicans want out of this process at this point?

For starters, they should still prefer a good deal, because going over the cliff could very well reset the terms of the debate in ways that are more favorable to Democrats. Most worrisome is the possibility that a few weeks, or perhaps a couple of months, into 2013, the pre-Bush tax schedule and revenue baseline will become the new normal in American politics. This could be the case if the anemic economic recovery now under way does not worsen in any visible way as a result of going over the cliff. If no new recession is in the offing and unemployment does not rise, pressure would ease on the president and Senate Democrats, who would certainly continue to profess an interest in reinstating the middle-class tax cuts even as they pocketed the entire $4 trillion tax hike. The end result would be the most unbalanced of all budget plans: a massive revenue increase coupled with zero spending cuts and no entitlement reform.

But this does not mean Republicans should take just any deal to avoid going over the cliff. They have some leverage in this fight (although less than they did before Thursday night). The president is under great pressure to find a way out, too. It remains possible that the tax hikes and spending cuts scheduled to begin in January will be non-events for the American economy. But most experts think otherwise, including the Congressional Budget Office and Fed chairman Ben Bernanke. The consensus is that $600 billion in fiscal consolidation in a one-year period will be enough to push the economy back into a recession — a mild one, yes, but a recession nonetheless. Unemployment would probably rise above 9 percent again. Five years into the Obama administration, this would represent a large setback for the president. He would certainly try to shift the blame to Republicans, and he might even have some success in doing so. But a recession that began on his watch, not his predecessor’s, would inevitably color — and harm — his entire second term. When Republicans reenter negotiations with the president or with Senator Reid, as they inevitably will, they need to keep this in mind.

Even after the failure of Boehner’s plan, two possible scenarios for avoiding the fiscal cliff before year’s end still remain: the small “kick the can” option and the mini–“grand bargain” plan. Republicans need to be ready for either scenario.

Under “kick the can,” there’s no ten-year agreement on spending, or even on a process to produce spending restraint in 2013. It’s just a way to postpone the cliff, probably for a year. At this point, the most likely scenario is that some version of Reid’s earlier tax bill will be resurrected and passed again in the Senate. Under the earlier version, the top rate would be allowed to rise from 35 percent to 39.6 for all households with incomes above $200,000 ($250,000 for couples), on a permanent basis. At the same time, the rest of the Bush-era rates would be extended for one year for the “non-rich,” and the alternative minimum tax would get patched for 2012 and 2013.