The GOP's Debt Ceiling Leverage Delusion

There has been a lot of chatter in Washington about how Republicans are planning to ultimately cave on the tax rates for the top 2% now and use the upcoming need to increase the debt ceiling to force deep cuts in the social safety net. They want a political war with the president next year (since, you know, their previous political wars against this president turned out sooo well).

Bob Corker, Senator from Tennessee, led off the charge:
CORKER: The Republicans know they have the debt ceiling, that is coming up around the corner, and, the leverage is going to shift, as soon as we get beyond this issue. The leverage is going to shift, to our side where hopefully we’ll do the same thing we did last time and that is if the president wants to raise the debt limit by $2 trillion we get $2 trillion in spending reduction and, hopefully, this time, it is mostly oriented towards entitlement and with no process. [...]
The president has already responded to this, and he did so at a business forum: "I will not play that game," said the president. Then, everyone's favorite McCain lackey, Sen. Lindsay Graham, went on TV to say, "we will play that game," indicating that Republicans in Congress would force the president's hand.

Well, I hate to break it to you, Sen. Graham, but it's not a game you can win. And Sen. Corker, no, the leverage will not "shift" if we get to a debt limit fight next year. There is no there there. A debt ceiling hostage taking won't work this time. But why not? The House is still in Republican hands, and they can, if they want, not approve a debt limit increase, right? Not really. The Republican strategy is really stupid. The president is poised to take the game off the table not simply because he says so. Not even because Democrats and progressives in Congress are already organizing to back him up fully (I'm glad they learned some lessons). It's because the GOP's own strategy has left him with the cards to do just that.

Let's see it again, shall we? They want to give the president the middle class tax breaks, and only the middle class tax breaks. That means they are leaving on the table several other things: namely, extended unemployment benefits that will expire, the payroll tax cut that will expire, etc. But that's just on the middle class side of things. What else are they leaving on the table? The estate tax. On January 1, 2013, the inheritance tax is scheduled to reset to 55% for inheritances over $1 million (it is currently at 35% with a $5 million exemption, and President Obama wants it at 45% with a $3.5 million exemption).

What else? Capital gains tax rate will go up from 15% to 20%, and all dividends will be taxed as ordinary income. The president's proposal is to raise the capital gains rate and tax dividends as ordinary income, but only for incomes over $250,000.

Any more? The Alternative Minimum Tax, which, if Congress leaves it unchanged, will affect more people, but also more affluent people (although they don't have to be super rich).

Then there is the Medicare doc fix, which providers will clamor to get Congress to fix as well as the huge cut in defense spending to the tune of $600 billion, which will happen if Congress does not end the sequester.

Oh, and by the way, all of these other tax increases and the budget cuts scheduled - will give the treasury more revenue, less spending, and thus the president and the country more time before the debt limit is reached (breathing room to engage in other policy discussions to corner the Republicans... oh I dunno... immigration reform, for example?). Nobody - not seniors, not the business community, not even the uber rich, will stand for this stand off. That is why Republicans are going to lose on that fight.

If Republicans want to mesh all of these things in with the debt limit increase, they will find themselves once again backed into a corner and at the losing end of both a policy battle and a political one. If they try to play this as hardball, the president can simply leave the estate tax rate at the reverted rate. Republicans want the estate tax to go down? Give the president a clean debt limit increase. They want to lower capital gains and dividend rates for most people? Release the debt ceiling hostage. They want defense spending from being slashed as much? Quit talking about obliterating the social safety net. The president will have all the leverage he needs if the Republicans let it get there by doing nothing other than extending the middle class income tax breaks this year.

The Republicans cannot win this. Whether they cave to most of the president's demand now and save face by getting a few things they want, or be further humiliated in a couple of months after the debt limit "fight" blows up in their face and they have to cave again is their choice. If they give the president a good deal now, they could even include the debt limit increase (or better yet, handing it off to the president), and not have to face this humiliation next year.

But, they seem destined on never learning that this president has beaten them at their own game again and again. They seem destined to never understand that this country has smartened up to their destructive tactics. They seem destined to humiliate themselves.

Well, so be it. Please proceed, Republicans.