Fiscal Cliff

Have the Fiscal Cliff Negotiations Reached a Dead End?

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Have the fiscal cliff negotiations reached a permanent dead end? 

For several days, discussions seemed to be moving toward an agreement. Both sides had narrowed their disagreements to two key issues: Whether top tax rates would rise on income above $400,000 or above $1 million, and whether a deal would include enough spending cuts to match new tax revenues. President Obama said his proposal raised $1.3 trillion and cut the same amount. House Majority Leader John Boehner counted just $930 billion in cuts, because the remainder of the savings came from reduced interest payments. 

But discussions went off the rails earlier this week when House Majority Leader John Boehner announced that he would be pursuing "Plan B," in which he would introduce a bill to preserve current tax rates on all income under $1 million annually.

Plan B, which Republican leaders now say is likely to pass, is designed both as both a fallback plan and a way to create some extra negotiating leverage for Republicans: If Plan B passes and then we go over the fiscal cliff, Republicans can say that they passed a bill designed to stave off tax hikes on most everyone—but still raise taxes on millionaires. And they can also say that the president threatened to veto it. They can also point out that taxing millionaires at a higher rate is an idea first proposed by Democratic Sen. Chuck Schumer—and yet now Democrats are rejecting it.

The White House isn't happy, and is accusing Boehner of wasting time on a plan that can't pass. And John Boehner is playing tough as well. At an extremely brief press conference yesterday, he offered a Tweet-length ultimatum: "Tomorrow the House will pass legislation to make permanent tax relief for nearly every American," he said. "Then the president will have a decision to make. He can call on Senate Democrats to pass that bill. Or he can be responsible for the largest tax increase in American history."

So is that it? Possibly. President Obama could still decide not to negotiate further, and to go over the fiscal cliff. If that happens, tax rates go up on everyone. If that happens, it's hard to imagine that Republicans and Democrats would not quickly vote to reinstate current tax rates on income under $250,000. President Obama wins. Republicans get nothing: no Social Security changes, no new spending cuts, and higher tax rates on all income above $250,000.

Yet there are risks to this strategy as well.

First there are the potential economic repercussions of going over the cliff, even for a short time, which Obama probably would prefer to avoid. Second, there are the coming debt ceiling negotiations. If Obama pushes Republicans over the cliff now, there's a good chance they'll be even more determined to oppose the White House come the debt ceiling fight.

Which is why I don't think it's all over, at least not yet. There are still subtle signs that this is just a final round of posturing before a last-minute deal shapes up. A number of House Republicans have signaled that while they aren't thrilled with the direction things are going, they want to make a deal, and will probably ultimately support whatever final plan Boehner gives them. And while the White House isn't budging form its previous offers right now, they're also not saying they're done. President Obama is still urging Republicans to accept his offer. Indeed, lines of communication are still open. And both sides still seem to want to make a deal. If they don't, it'll be because they stopped here and never got any closer. But with more than a week left before the deadline, I wouldn't count on that just yet.