At his press conference yesterday, the President said (again) that Step Number 1 in the cliff negotiating process is to have Congress pass the middle class tax extension (<$250k). Obama said that after the middle class cut was signed into law, he would negotiate with Congress on all of the other issues that are on the agenda for the end of the year. I, for one, don’t believe a word of that offer. If Congress were to agree on those middle class cuts, Democrats would no longer negotiate on the remaining issues, they would dictate the outcome.
The President’s words:
"I won’t pretend that figuring out everything else will be easy."“Easy”? I would say “impossible” is a better description. If the middle class tax cuts are signed into law, the Democrats will not give an inch on the rest of the critically important issues. Who’s kidding who?
In the end, there will (probably) be some agreement that will result in taxes on wealthy American’s going up, while middle class taxes rates are held at the Bush era levels. But the idea that Republicans, and the 48% of the people who did not vote for Obama, should grant the middle class some tax bennies prior to getting an understanding on all of the other items that are on the fiscal cliff, is just silly to me.
The other day, Democratic Senator Patty Murray (WA) spoke about allowing the country to fall off the cliff. Murray (and presumably Obama) believe that Republicans would crumble when the consequences of the “cliff” crush the Republican political base. Her words:
“If the Republicans will not agree with that (preconditions for negotiations), we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year”Senator Murray wants to play hardball. So does the President. Both are insisting that Republicans bend over and agree to “fix” one aspect of the fiscal cliff prior to the end of the year, and then push off addressing all the remaining issues to sometime in 2013, maybe, possibly, no promises though. The thinking by Obama and Murray (and many other Democrats/liberal pundits) is that they have all of the bargaining chips on their side of the table.
I think that Murray and Obama have it backward. If the US does fall off the cliff, then it will be the Democratic base that will have its ass handed to it.
-The under $250k Bush tax cut would go away. This would be a middle class disaster. It would cost the 97% a whopping $223 billion in take-home pay in 2013.
-The AMT would hit people with incomes of > $50K. The IRS puts the number of new taxpayers who will get hit with the AMT at 30m. 97% of those poor folks are in the middle class today.
-Payroll taxes go up on 1/1/13. That will cost the average family $1,700; this is a very “regressive” tax increase. The cost to middle class workers will be another $112 billion in lost take-home pay.
-Unemployment insurance benefits would be cut.
I think the President has made a very dangerous move in the game of chess that is called the fiscal cliff. I don’t think Republicans will agree to give Obama the one thing he has insisted on without getting an agreement on all (or most) of the other issues. The “Reds” would be stupid if they did that.
I don’t know where Obama learned his negotiating skills, but he needs a tutor. I think the odds are very high that House Republican’s say “No”, and do not give Obama what he wants. If Boehner (or some other big shot Republican) says “no” at (or after) this Friday’s meeting, the odds of falling off the cliff will shoot through the roof. Markets will respond accordingly.
The market reacted appropriately to the President’s press conference yesterday. It fell like a stone after he reiterated his demand that Congress fix one thing today, and leave everything else blowing in the wind. The US stock market has lost more than $1Trillion since the election. A significant portion of that loss is attributable to the President’s insistence that his horse goes before the cart.
Maybe the election results give Obama the right to negotiate using the tactic, “My way or the highway”. But I don’t think Obama really has the stick he needs to beat Republicans into submission. At some point he will be forced to recognize that his bare knuckle fighting style is going to get his Administration bloodied, and bring his base of supporters a world of hurt.
About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting. (EconMatters author archive here.)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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