House Speaker John Boehner signaled this weekend that Republicans wouldn't negotiate a grand bargain on the debt ceiling if forced to accept over a trillion dollars in tax hikes now for promises of tax and entitlement reform later. This caught everyone by surprise, apparently even the president, who held a press conference to express his desire to push the Republicans into just such a deal. Days after insisting that negotiators "leave their ultimatums at the door," Barack Obama offered some of his own, with more references to corporate-jet owners and oil company tax "loopholes," while insisting that Republicans accept tax hikes as the price of admission.
And the president is mystified why a grand bargain can't be found?
The notion of a comprehensive fiscal deal in July has always been fantasy. In order to craft such an agreement, Congress and the White House would have to simultaneously resolve all of the following issues:
• Social Security
• Corporate tax
• Personal income tax
• War policy and military spending
Not only would the grand bargain need to resolve all of these issues, but Congress and the president would have to solve them in a matter of days. With the debt ceiling deadline generally accepted as Aug. 2, all sides want a resolution early enough to pass the bill and have it signed before that date to keep the markets from getting spooked. Even if the negotiators managed to agree on the particulars of perhaps the most complex fiscal reform attempted in decades within that period of time, Democrats and Republicans in Congress would want a full debate on structural changes that would be so extensive as to dwarf ObamaCare.
The notion of a comprehensive fiscal deal in July has always been fantasy.
Obama would love to get the Republicans to provide cover for tax hikes, both to get them passed and to protect himself in the next election cycle. But in order to give them a reason to buy into changes that close targeted (so-called) loopholes, the White House has to give Boehner a way to sell it to his caucus. Republicans want sweeping reforms of the tax code, in both personal and corporate taxes, that flatten and simplify the tax code in order to provide easier compliance and better predictability for investors. That kind of reform could pay substantial benefits to both parties; Republicans can take credit for lowered top rates, while Democrats could take credit for boosting revenues and promoting "fairness" through closed loopholes.
In fact, that is the kind of approach that Obama's own debt commission recommended. However, that isn't what Obama offered Republicans. He demanded tax hikes first, with promises for reform later, a position that puts the GOP entirely at odds with the pledges it made in the 2010 election, which voters across the nation endorsed. Republicans remember all too well another deal on spending cuts that required them to raise taxes first — the 1990 budget deal with the first President George Bush, whose "read my lips" pledge to stop new taxes got turned into a series of attack ads by Democrats in 1992. The Republican leadership isn't about to fall into that trap again.
Even if Obama and Boehner made an agreement to seek comprehensive tax reform, there just isn't enough time to do it. It would take weeks, if not months, to draft such legislation and debate it in both chambers of Congress, and the White House insists it has to have a deal in days. And that doesn't begin to touch upon the even-more complicated policy areas of Medicare and Social Security reform, and the debate on the nature of America's military investment and global reach.
That leaves Boehner with two options. One would be to conclude a short-term agreement on the debt ceiling, perhaps 90 days, that would allow for more time to develop the comprehensive grand bargain on the scale Obama demands. Unfortunately, Obama explicitly rejected that very idea. "I will not sign a 30-day or a 60-day or a 90-day extension," the president responded to the question from Ben Feller of the Associated Press. "That is just not an acceptable approach." Why not? It might continue investor anxiety for a short period of time, but surely that would be a minor consideration if it delivered the kind of deal Obama envisions and demands. For a man who wanted ultimatums left at the door, Obama certainly took a my-way-or-the-highway approach on timing.
The second option would be to scale down any deal, an option that Obama also opposed in his press conference but won't have the luxury of rejecting. If Boehner offers to raise the debt ceiling by $2.5 trillion in exchange for an equal dollar value in cuts – which Vice President Joe Biden's panel has already identified — that gives the White House enough room to operate for about another eighteen months at the current deficit level, which would push off any further debt ceiling debate until just after the 2012 elections. That would allow the next election cycle to be fought on fiscal policy, and whether American voters want more government spending and higher taxes, or reform of Medicare, Social Security, and the personal and corporate tax codes that Republicans would then have time to prepare.
Senate Minority Leader Mitch McConnell recognized that Obama might still try to walk away from even a moderate-scale deal, at least for a few days, in order to pressure Republicans into the tax trap. That's why he floated what amounts to the nuclear option for both sides late Tuesday. Republicans would give up trying to control the debt ceiling for most of the next two years, in exchange for 1:1 cuts from Obama — but Obama would end up entirely owning the debt ceiling, the deficit, and spending for the 2012 election. Conservatives might not like this option for a number of good reasons, but if Obama refuses to drop his ultimatum for a commitment to $1 trillion in tax hikes now in exchange for gauzy promises to reform the tax code later, they may have no better way to set up the 2012 elections than to make Obama take responsibility for his own spending spree.
Boehner seems willing to have that fight in November 2012. Obama appears as if he'd do anything to avoid it.