Republicans don't want to give up their hostage-taking leverage on tax cuts:
With the Bush tax rates due to expire Dec. 31, that fight between Republicans and Mr. Obama, who favors extending the rates only for income below $250,000, will play out in Congress’s lame-duck session this month. On Thursday, the White House served notice that Mr. Obama, who a day earlier signaled a willingness to compromise, would not sign on to any deal making permanent the lower rates for income above $250,000.
“The president does not believe, and I think would not accept, permanently extending the upper-end tax cuts,” said his press secretary, Robert Gibbs.
The two sides could settle for something less than a permanent extension of the top rates, Mr. Gibbs suggested. Democrats say they might agree to a one- or two-year increase, and longer for the middle-income rates.
But Republicans say they will insist that, whatever the duration, all rates must be extended in tandem — the easier to extend them together again in the future. Both sides recognize that, politically, Republicans would have a harder time in the future trying to extend only the rates that benefited the richest Americans, about 2 percent of taxpayers.
The key thing to remember is that we're talking about two tax cuts. The first one applies to everybody, across-the-board, on their first $250,000 of income. That's the one President Obama is pushing for, and virtually everybody in Congress says they support it to. The second tax cut only applies to people who earn more than $250,000 and it would cost $700 billion over the next ten years. Obama says the price tag for that tax cut is too high, and that given the size of the deficit, enacting it would be bad policy. Republicans, however, are tax cut fundamentalists, and they are saying that if the high-income tax cut isn't passed, nobody should get one.
Given that there's virtually no way to get the across-the-board tax cut passed without Republican support, President Obama has signalled his willingness to agree to a temporary extension of the GOP's high-income tax cuts in exchange for GOP support for a permanent extension of the across-the-board tax cut. That's not ideal policy, but it's a fair compromise. And by putting the two different tax cuts on two different timelines, Republicans wouldn't be able to hold it hostage when it expires: they'd have to defend it on its own terms.
Obviously, the prospect of defending that tax cut on its own terms has freaked Republicans out. And they are making what is probably a smart political calculation by refusing to give up their hostage-taking power. In so doing, they are dramatically raising the stakes, forcing President Obama to decide whether to either (a) agree to a temporary extension of both tax cuts, a move which continue the GOP's hostage-taking leverage when they expire, or (b) call their bluff and dare them to hold the tax cuts hostage.
I know some people don't agree with me, but I'm perfectly fine with the Obama compromise because it would permanently extend the across-the-board tax cuts while decoupling them from the upper-income-only tax cuts. I also think refusing to accept a permanent upper-income tax cut is the right position -- the impact on the deficit would be enormous. But the Republican position that we should hold the across-the-board tax cut hostage to the permanent one is offensive on its face and won't go over well with the public. I hope Republicans back down and agree to the Obama compromise, but if they don't, this is a fight President Obama should not back down from. And I don't think he will.