Obama’s asking for it; maybe the GOP should give it to him

It appears more and more likely that Washington’s new favorite drama, the fiscal cliff, will run as long as possible.

Passing new legislation before Christmas to avoid the cliff — the doomsday nickname given to the combination of across-the-board spending cuts set during last year’s debt-ceiling negotiations and the total expiration of income-tax rates that have prevailed since since 2003 — now seems unlikely. House Majority Leader Eric Cantor on Wednesday said lawmakers can expect to be in Washington during December’s final days.

The fatal conceit in this debate is that the economy will somehow be well-served, or at least survive, if it takes only a half-dose of what Democrats consider poison (spending cuts) and a half-dose of what the GOP deems deadly (tax increases).

If either party is correct, we are in for a rough 2013 at the very least. If both parties are correct, we could be heading for another recession. The irony is that we’re trying to avoid the fiscal cliff in order to prevent … a recession.

Only President Obama has proposed a pure version of his preferred course: A $1.6 trillion tax hike on upper-income earners over the next 10 years, recently reduced to $1.4 trillion, with no guarantee of net spending cuts. The House GOP’s opening salvo had much more of the “balance” Obama insists on.

Many observers have dismissed the president’s proposal as a mere negotiating stance. Perhaps they’re right. But one presumes he wouldn’t have made a proposal he wasn’t ready to accept.

That is, one presumes Obama really believes taking an extra $140 billion out of the economy each of the next 10 years — remember, he says the money is for deficit reduction, not to fund new government spending — would not be harmful to businesses, workers or the unemployed.

Members of Congress are supposed to do what they believe to be in the best interests of the country and their constituents. But if House Republicans cannot persuade Obama to agree to meaningful entitlement reforms, which along with more rapid economic growth are the only way to bring our fiscal house in order, they should consider giving Obama what he wants.

This is not a decision to be taken lightly. But Republicans might not win this policy argument in the long run if Obama can pin the blame for economic damage on GOP spending cuts, while continuing to demagogue the rich for not paying their “fair share,” without consequences.

And there would be consequences for following his plan. Today, $140 billion equals almost 1 percent of gross domestic product. When the economy is struggling to grow by an annual rate of even 2.5 percent, taking another 1 percent of GDP out of the private sector will not help matters.

But what about the 1990s? Didn’t Bill Clinton raise taxes back then, only to watch the economy boom?

Yes, but there are major differences between then and now. Clinton raised taxes as both the U.S. and world economies were stronger than now. He did it when state taxes were broadly lower than they are now. He did it when oil was closer to $20 a barrel than $90 a barrel. He did it before a record housing boom, not after its bust. He did it at the onset of the IT boom, which doesn’t figure to be replicated anytime soon. And before revenues really grew, he cut the capital-gains tax rate, rather than raising it as Obama desires.

Worse, Obama wants to get most of this $140 billion in part by raising marginal tax rates on “the rich” whether their earnings come from their labor or their investments. This has a significant impact on decision-making. For just one current example, look at the growing number of companies paying their anticipated dividends for 2013 out to shareholders now to beat a potential tax hike.

Some of these companies, Costco for example, are even borrowing money to pull off this switcheroo — committing themselves to pay back billions they only hope to earn as profits in the future. Talk about distorting economic behavior.

Obama says the people voted for these higher taxes. While I believe Obama’s proposal would be very harmful economically, congressional Republicans might find themselves with little choice but to allow his policies to prove him wrong in practice. Obama could hardly blame them for letting him entangle himself with the rope he’s demanding.

– By Kyle Wingfield

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