• With: Kim Strassel, Dan Henninger, James Freeman, Dorothy Rabinowitz, Bret Stephens, Matt Kaminski

    This is a rush transcript from "Journal Editorial Report," December 8, 2012. This copy may not be in its final form and may be updated.

    PAUL GIGOT, HOST: This week on the "Journal Editorial Report," as fiscal negotiations drag on are Republicans ready with a Plan B, or is going off the cliff a better alternative?

    Plus, mayhem in the Middle East as worries grow that Syria may use chemical weapons and Egypt moves closer to civil war. Can the U.S. stay on the sidelines much longer?

    And a military judge removed from the trial of Fort Hood suspect, Nidal Hasan, after demanding the Army major shave. Did the order show bias?

    Welcome to the "Journal Editorial Report." I'm Paul Gigot.

    Little progress this week in efforts to avoid January's looming tax hikes and across-the-board spending cuts, commonly known as the fiscal cliff. Despite a phone call between President Obama and House Speaker John Boehner, the two sides appear to be no closer to a compromise. But are Republicans working behind the scenes on a Plan B?

    Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; assistant editorial page editor, James Freeman; and Washington columnist, Kim Strassel.

    So, Kim, you have been working the phones the week. Are the talks as dead in the water as people say or is there something here that's really going on between Speaker Boehner and the president?

    KIM STRASSEL, WASHINGTON COLUMNIST: No, I think that they are nowhere. And it's because the president is refusing to budge at all on the top tax rates. In fact, they hardened their language this week, saying, oh, absolutely, we'll go off the cliff if the Republicans don't accede to that demand. And since Republicans had drawn a bright line around that, we're still at a standstill.

    GIGOT: But, Kim, why is the president so insistent on increasing tax rates? Boehner has already put on the table a comparable amount of money to be gained from putting a cap on deductions, about $800 billion over 10 years. Why insistent on rates?

    STRASSEL: Look, Paul, there are two reasons. The first is ideological. His partisans, his liberal base believe this is somehow a symbol of winning the tax fight, and you can only do that by raising the rates on the wealthy in the country, and so they're insistent on that.

    The other thing the president is interested in is he wants a double deal here. He wants to both raise tax rates and also take the deductions, the closing of tax deductions that the Republicans have offered. So he is trying to up the ante. And he feels that if he gives on tax rates now, if he doesn't demand that, that he's looking at a much lesser pie of tax revenue down the line.

    GIGOT: So he's raised the ante, Dan, not from $800 billion to $1.6 trillion over 10 years.


    GIGOT: So he gets 800 -- you only get $800 billion even on the best scoring from the raising of the rates he wants to raise. So he's got to get the rest from deductions, but that's a huge revenue hit.

    HENNINGER: Of course, it's a huge revenue hit, but that's what the president wants. I think what he really wants is to enact these tax rate increases and make them permanent.

    There's a kind of conventional wisdom that we'll do these things and then sometime next year, even the president says, we'll do a more extensive tax reform. That's not going to happen. This is Barack Obama's tax reform. He's going to raise these rates, raise the rates on capital gains and dividends, possibly even the estate tax, and the deductions and exemptions, and he'll be done with tax reform. Tax reform is very hard to do. I think his goal is to make this set of tax changes permanent.

    GIGOT: I think he wants one other thing else, one other thing, too, James, and that is he wants Republican fingerprints, that is votes, in favor of raising rates, because he knows, if that happens, he divides the Republican Party and he offers some protection for Democrats for raising taxes in the next congressional election.

    JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Absolutely. Breaking the Republican Party would be a benefit to this plan. Also, I don't think Barack Obama minds if the tax rates go up on the middle income people as well.

    GIGOT: But he's promised so insistently that he doesn't.


    GIGOT: You're saying that privately --

    FREEMAN: For him, the ultimate win is to have all of that new revenue for the government and being able to blame it on the Republicans. So --


    GIGOT: Hold it. Wait a minute. Are you're saying that if we go over the cliff, nothing happens in December, come January, the president will not turn around and not insist on the middle class portion of these tax cuts?

    FREEMAN: I think he would be happy is there was no deal and --


    FREEMAN: all of the taxes went up and he was allowed to say, look, Republicans wouldn't come along on this.


    GIGOT: Wait, wait. Hold, hold. Twenty million people will be hit by the alternative -- more people would be hit by the alternative minimum tax, for example, if nothing happens. That's -- that -- and you know where the taxpayers are, James. I hate to tell you this. They're in your state --


    -- in New Jersey, Connecticut and in New York, and they're in California and Illinois, a lot of places where Democrats govern, because they have the most deductions at the federal level.

    FREEMAN: Well, as we've explained many times, the amount of money he can get from his tax rates on the rich, even if he got his Buffet tax, it does nothing to solve the deficit problem. So, he knows eventually taxes are going to have to hit the middle class.

    There's a number of ways to do that. One is a VAT tax, a carbon tax on energy. And another way is just raising income rates on everyone. And if he can blame that on Republicans, this might be the way to get that started.

    GIGOT: I'm going to have to disagree on the politics of what James says, Dan. I think the president can't let that alternative minimum tax hit because the pressure from his own party and from senators up for reelection in 2014, the Democrats, would be enormous.

    HENNINGER: Yes, I kind of agree, James. I think that would be an Achilles heel for the Democrats. The one place -- the third rail, as we say, they don't want to go.

    I agree with you, Paul, that the game here is to hang this on the Republicans, and then pitch that forward -- I've said this before -- to those mid-term elections. They want to bring the Republicans down in the House. And I think that's the strategy behind what's going on here.

    The idea that you're going to do all of these tax changes in two weeks before the end of the year? Tax policy has never been written that way.

    GIGOT: Kim, do the Republicans have more leverage here than they think because of the alternative minimum tax and some of these other issues?