Garett Jones  

Brinksmanship and the Obama-Bush Tax Cuts

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Matt Yglesias is claiming that POTUS and Congressional Democrats can safely ignore John Boehner

To take the bargaining process seriously at this point you have to believe that come 2013, House Republicans would actually refuse to cut taxes on the grounds that the president's tax-cut proposal doesn't cut taxes enough. Then they would blame the economic drag and middle-class pain that their own refusal to cut taxes had caused on the Democrats. But that doesn't pass the laugh test as a political argument.

It doesn't matter whether that argument passes Yglesias's laugh test.  All the matters is whether it passes the House GOP's laugh test.  

And if it does--if a substantial majority of the House GOP are comfortable going on talk shows demanding "tax relief for all Americans," that time-tested (and presumably donor-tested) phrase--then the bargaining game changes completely.  All the House needs to do is vote for a bill giving "tax relief for all Americans" and a good fraction of the House GOP will be able to sleep well at night and a couple of dozen more will just pop a Xanax.  After that, it's just a matter of which side blinks first.  

Fortunately, recent history gives us an N=1 piece of data on who blinks first when tax cuts for the rich are on the line: Democrats.  You'll recall that we actually faced a similar tax standoff in 2010, and I'm sure Google can prove that plenty of left of center bloggers told the President that he didn't need to give in to the GOP's demands because of some theory of human rationality.  But all the same, the President gave in.  [Insert obligatory reference to Dixit and Nalebuff's excellent treatment of brinksmanship here.]

And remember, President Obama didn't even face a GOP-controlled House at that point.  One can detail the differences between 2010 and 2012 but I doubt the differences net out to much.  

Why did President Obama cave in 2010?  Why might he cave today?  What does he (probably) see that the progressive blogosphere (probably) does not?  

The President knows that the GOP isn't just trying to please the median voter (and I say this as a fan of the median voter theorem). The GOP is also trying to please something like the median Republican, just as  Democrats are trying to please something like the median Democrat.  Each party is a cartel, controlled substantially by the median member of the cartel.  And as long as the median cartel member is happy, there's some surplus to spread around.  

Cox and McCubbins wrote a fantastic book about this concept of parties as cartels: Legislative Leviathan, a blend of rich institutional knowledge, history, statistics, and public choice.  When I think of parties as cartels, the behavior of the House GOP makes more sense--just as Congressional Democratic votes for ACA made sense.  

And once we think of parties as cartels--organizations that have real-though-often-invisible tools for disciplining their members--we can understand why Representative Weiner resigned: The cartel had power, the power to reward or punish with an invisible hand. 

My prediction: The outcome of the fiscal cliff battle will be reasonably far from President Obama, Majority Leader Reid, and Minority Leader Pelosi's bliss points.  More formally, it will be outside their Pareto set.   Boehner--a willing compromiser--will ultimately be able to say he kept tax rates on the rich from going all the way back up to Clinton-era levels.  

Coda: Remember that Boehner is open to raising tax revenues from the rich.  That's a bargaining angle I'm looking forward to watching over the next few weeks.  

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COMMENTS (8 to date)
Brad Strang writes:

Even more interesting to watch will be the separation between the Neo-conservatives, and Tea party supporters.

Jon writes:

I am looking forward to a revenue vs rates compromise. For one it allows everyone to save face and has some sound economics behind why it is the better alternative given the fiscal situation.

If Obama is a centrist compromiser, he should be leading this position to straddle the two parties.

Yancey Ward writes:

The Democrat's hand is weaker than it seems here. While it is true that Republicans are nominally the party of the higher income classes, such people are concentrated in the blue states of the U.S., and concentrated in the bluest parts of those states. It is no accident that one of the primary supporters prior to the election, of moving the threshold to $500K-$1,000 K was a certain Senator from New York.

In my opinion, the Republicans should just give on the higher income tax increase, and let the blue states fund even more spending for the red ones.

MikeDC writes:

Were I a Republican leader, I'd argue for letting all the Bush tax cuts expire and forcing Obama and the Democrats to take ownership of a big tax hike on 100% of their constituency.

If the Republicans simply fold on higher income taxes, it does nothing for them.

1. It hurts their small business constituency, but nobody else has to pay any price whatsoever. At least immediately.

2. Leaving the tax cuts in place on everyone but the rich doesn't solve the debt problem. It does nothing for the parts of their constituency that vote Republican out of a hope for fiscal responsibility. In fact, it tells them they'll be sold out immediately to satisfy the super rich and kick the can down the road.

3. And politically, it does nothing to change the longer run dynamics. If makers vs. takers is a big issue, then letting the Bush/Obama tax cuts expire for everyone turns some takers into makers and forces people to more accurately evaluate just how much the government is spending.

On the other hand, those dynamics do change if all the tax cuts expire.
1. It actually gets us much closer to a fiscally sustainable path.
2. It forces folks who want higher spending to confront that choice, and these folks are largely Democrats.
3. It forces a Democratic President and Democratic senate to take ownership of this. Outside of hardcore Democratic partisans (who aren't on the table anyway), I think the average Democratic voter is going to be surprised and upset to see the consequence of his vote is that his taxes go up.

egd writes:

Assuming for the moment that Republicans are the "party of the rich" (they're not) and their objective is to prevent raising taxes on the rich.

If they give in to the Democrats, then "the rich" have to pay more in taxes.

If they don't give in to the Democrats and neither side budges, then "the rich" have to pay more in taxes (along with everyone else).

Assuming then that the Republicans' sole desire is to give their rich friends tax cuts, what is the benefit of giving in to Democrats? They've put the Republicans in a situation where, according to their own rationale, there's no incentive to cooperate.

hana writes:

What are the consequences of allowing the "fiscal cliff" to occur?

If the hardest thing to accomplish is cutting programs, and if the Republicans desire is to see them cut, then it would seem that allowing the cuts to occur would be the best. The ensuing tax raises would be the easiest items for both sides to agree to address.

Correct me please, but I miss the gamesmanship point lost for Republicans allowing it to occur.

Essen writes:

The fiscal precipice:

http://www.beedictionary.com/blog/2012/11/meaning-of-precipice-and-its-usage/

Florida CPA writes:

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