Prior to the Christmas break, Patrick O'Connor and Peter Nicholas of the Wall Street Journal documented the behind the scene negotiations on the "fiscal cliff." There are a number of telling moments, but one sticks out in particular.
At one point, according to notes taken by a participant, Mr. Boehner told the president, "I put $800 billion [in tax revenue] on the table. What do I get for that?"
"You get nothing," the president said. "I get that for free."
Translation, President Obama told Mr. Boehner to pound sand because he holds all the cards.
In fact, it gets worse. According to O'Connor and Nicholas' sources, Obama warned Boehner that if both sides did not reach a deal—meaning if Republicans did not accept Obama's deal—that "he would use his inaugural address and his State of the Union speech to tell the country the Republicans were at fault."
President Obama believes, and perhaps he may be right, he has perception on his side. He can make no concessions and purposefully cause the negotiations to fail, yet succeed in blaming Republicans for the consequences.
Republicans fear this may be true, which partially explains their willingness to accept a bad deal. To their credit, they are fighting to protect as many small business owners as possible, who would be hit by the higher rates being hawked by Obama. Although the president insists that under his plan 97 percent of small business owners would not see their taxes increase, Obama seems purposefully to be relying on the broadest possible definition of small business (think lobbyists and business consultants). A separate study by the Treasury Department reveals "that raising tax rates for the top two income brackets, as Obama has urged, would affect 10 percent of small business owners that have employees. These represent 38 percent of income for such business."
Now, to add insult to injury, Obama and the Democrats are working to selectively preserve certain tax provisions called "extenders" for their big business buddies, continuing to fund green-energy boondoggles so eloquently described by John Fund in today's National Review. And, of course, avoiding sequestration, those lucrative defense contracts will keep many civilian corporate beneficiaries smiling.
The real tragedy here is two-fold: there is no serious discussion of entitlement reform and no serious discussion of tax reform. If we don't structurally change Social Security, Medicare and Medicaid, we will never get out from under the crushing burden of government spending and all that it entails in future debt and mountainous interest payments on that debt. As Mercatus scholar Veronique de Rugy shows in a chart in The Washington Examiner today, federal outlays as a percent of GDP have risen from an historical average of about 18 percent to five or six points higher.
But that's just the tip of the iceberg. The burden of federal spending will climb to closer to 40 percent of economic output in coming decades if policy is left on autopilot.
And if we also care about revenues, fairness, and economic growth, tax reform is the appropriate path forward. Selectively increasing rates or extending provisions is lousy tax policy and an invitation for more corporate cronyism. Much like our homes after a chaotic holiday season, the tax code is in desperate need of a thorough cleaning. We need to remove provisions that distort decision-making and impede transparency. We can take an already progressive code on the individual side and make it simpler and easier to apply through a modified flat tax. On the corporate side, we can remove all distortions and lower the corporate rate.
Instead of using this opportunity to improve America's chances to compete in a lackluster economic climate, we see our newly-elected president using his political capital to posture and lecture. At this point, he might as well have kept golfing in Hawaii.
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