Latest Obama Fiscal Cliff Gambit: Bad Negotiating, Bad Economics, Both, or Neither?


We’ve got an odd one on our hands here folks:

President Barack Obama said Tuesday that while tax rates must go up for a “fiscal cliff” deal, it may be possible to lower rates at the top end of the scale late next year as part of tax reforms that would close loopholes and limit deductions.

“Let’s let those go up,” Obama told Bloomberg Television in an interview, referring to tax rates for the wealthiest Americans.

“And then let’s set up a process with a time certain, at the end of 2013 or the fall of 2013, where we work on tax reform, we look at what loopholes and deduction both Democrats and Republicans are willing to close, and it’s possible that we may be able to lower rates by broadening the base at that point.”

There are a couple things wrong here both from a negotiations theory standpoint and from an economic perspective.  First, this looks too overtly like a bait and switch.  Obama is not the most trustworthy of negotiating partners, so this “pay you Tuesday for a hamburger today” gambit looks and smells alot like the Tip O’Neill phony baloney that Republicans need to be, justifiably, on guard against.  Why is he still asking for trust from the Republicans when he knows that he doesn’t have their trust and hasn’t presented anything to earn it?  Second, this undermines his insistence so far on higher taxes for the rich.  Isn’t Obama equating his push for higher rates with a revenue stream over 10 years?  Wouldn’t raising rates now only to lower them in a year or so mean only a year or so of revenue?  The 10 year figure barely put a dent in our looming fiscal catastrophe, one or two years won’t even register.  Unless there is more to this, Obama just neutered an already pretty lame argument for higher taxes.  Furthermore he is confusing his base; he is stating, even more nakedly, that he wants to raise taxes for purely emotional reasons – “fairness” – but then saying that he ultimately wants to lower taxes on the rich and raise them on the non-rich (that’s what “broadening the base” means).  He’s all over the board here, seemingly trying to appeal to everyone and no one.

Now to the economics.  The tax landscape is already highly uncertain and the economy is plagued by this uncertainty.  So what does Obama do?  Go ahead and inject more uncertainty.  Tax rates are to go up, but then only to come back down in a short, but still indeterminate, time frame and in an indeterminate manner?  Huh?  That means more planning, more fretting and more sitting on the sidelines.  If the prospect of a new tax regime is a year or two away, investors and high-earners will duck, dodge and game the system for that time period.  Witness the rash of dividends flowing out of companies to beat the end of year deadline.  Lastly, in economics, as in most of life, if something is the right thing to, it is the right thing to do now.  So if Obama is admitting that the right thing do is to reform, which includes lower rates for high earners and a broadened tax base, why isn’t that the right thing to do now?  Why the interim step, which is by definition not the optimal policy?

Very strange.  Is this Obama walking back his position?  Normally, I’d say yes, it’s a clear opening for a broader reform process to begin.  However, given that this is Obama we’re talking about, it could just be horrible negotiating and/or economic incoherence.  We’ve seen plenty of that to know he is thoroughly capable of such.  Head-scratchin’ time.

Related posts