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Obama is probably correct to count on the following leverage during the upcoming negotiations on the debt ceiling and on the deferred sequestration, without the threat of tax cut expiry resulting automatic reversion to Clinton-era individual income taxes.

Wealthy individuals and financial institutions would be hurt badly if Republican refusal to raise the debt ceiling hits confidence in the federal government Treasury bills. The “zero risk” of T-Bills is a very important pillar of financial markets.

Wealthy individuals and financial institutions thus have major incentives to pressure Republicans to raise the debt ceiling, especially now that the individual income taxes of these players have been removed from the basket of issues presently on the table.  These players also generally benefit from US military spending, and from US military activity, which could be affected if sequestration was implemented.

The above logic, of course, depends on key players acting logically, so there is some risk of wealthy individuals and financial institutions repeating some of their bizarrely emotional reactions to Obama. (Interesting summary speculation on their psychological issues is posted at: http://www.washingtonmonthly.com/...).

A part of this incentive equation that is missing, however, is the tax rate applicable to “carried interest”, discussed after the jump.

The tax rate applicable to “carried interest” recently got much publicity from it being central to Romney’s low tax rate.   Apparently this issue went quiet in recent months because (per: http://pandodaily.com/...)

carried interest may be too complicated of a fix to enact in the shrinking timeline around the issue.
What makes this complicated are the differences between:
real estate investors, private equity guys or hedge funds … [Venture Capitalists] and entrepreneurs
The importance of this issue has been reduced somewhat by the Biden-McConnell deal’s increase in taxes on capital gains, but these are still lower than the top tax rate on ordinary income.

In light of the above, one question during the next 60 days will be how many of the above wealthy individuals and financial institutions, as a condition of their pressuring Republicans on the debt ceiling, try to pressure Obama for assurances on carried interest.  Since this issue cannot be addressed formally outside of a comprehensive tax reform, the only assurance Obama would be able to give them would be the type of informal promise that he made to the pharmaceutical industry in order to secure their support for the Affordable Care Act (summarized at: http://www.rxrights.org/...).

Thu Jan 03, 2013 at 7:43 AM PT: As Ezra Klein commented today (in article linked from Dkos Pundit Roundup, at: http://www.washingtonpost.com/...)
the constellation of economic interest groups that converge on Washington understands the debt ceiling better than they did in 2011, are becoming more and more tired of congress’s tendency to negotiate by threatening to trigger economic catastrophes, and is getting better at knowing who to blame. It’s not a meaningless sign that John Engler, the former Republican Governor of Michigan who now leads the Business Roundtable, called for a five-year solution to the debt ceiling.

Unfortunately, part of why Klein expects Obama to obtain a successful result from the next round of deadlines is his "definition of success that will sound reasonable to most people — a dollar in tax reform for a dollar in spending cuts"  The scary thing is that this 1+1=2 dollars of anti-stimulus austerity.

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Comment Preferences

  •  Well, (0+ / 0-)

    I suspect you understand RATIONAL political-economic behavior very well, but you're speaking on American politics from way outside America, and you don't understand that some 30% of our legislature is completely IRRATIONAL at this point.  Without rational behavior, your expectations are likely to be disappointed.

    •  Even if 50% of Repub Congressmen R irrational (0+ / 0-)

      and even if another 30% expect to lose primaries if they display any rationality,

      doesn't that leave room for 17+ Republican Congressmen to vote with Democratic Congressmen to raise the debt ceiling (and to go around the Speaker to schedule a vote)?

      If financial institutions promise well-paid jobs in case of losing a primary, why would this not recruit 17+ aisle-crossers on this issue?

      Of course, wealthy individuals and financial institutions are also not always rational,

      but I expect that their minds will be concentrated by the great damage to their interests that would result from failure to raise the debt ceiling, especially now that they are not distracted by the previous conflating of their individual income tax positions in the same game of "chicken".

fou

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