Obama Risks it All for Tax Hike

“So our view here is the president won’t sign a deal that doesn’t have higher rates for the wealthy. Until they cross that bridge, nothing else is relevant.”

-- White House Communications Director Dan Pfeiffer talking to The New York Times.

We know President Obama’s insistence on making higher tax rates for top earners isn’t about the money.

Not only would the additional payments by those families making more than $250,000 and individuals making more than $200,000 be a relatively small sum – something like one week of federal spending next year – but the president is turning down proposals that would provide similar revenues by closing loopholes.

For Obama, this is in part about principle. He believes income inequality is a huge problem facing the nation. The president also seemingly believes that by knocking down the income of the top 2 percent of earners by an estimated average of $36,000 per household, and then taking that money and spending it on government programs aimed at lower-income Americans, it will help narrow the gap between the rich and the middle class.

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    Hence the fact that in his proposal to avert across-the-board income tax hikes, unveiled to stunned Republicans and political watchers, are calls for spending most of the first year’s worth of the tax hike on a stimulus spending package, likely aimed at helping state and local governments retain workers and maintain programs.

    But again, the president is rejecting plans that would provide similar reductions in net income for top earners, so he pretty obviously isn’t as concerned that this particular deal comports with his goal of wealth redistribution.

    Obama is playing a longer, riskier game than that.

    The president’s proposal is designed to fail and designed to take the nation right up to the so-called fiscal cliff.

    If the GOP breaks in the end and give him his rate increase then he will not only have won a big victory but also will have left his rival political party in a shambles, having forced Republicans to violate the core principle that has animated their party for two decades. Obama could head into 2014 midterms knowing that Republican primary voters would be undertaking a vicious ideological fight on taxes.

    But what if the Republicans don’t accept higher tax rates as a precondition for negotiating a larger deal and the federal government jumps the cliff.

    The Obama Democrats are sanguine about the prospect, believing that they can get a much better deal overall once everyone’s taxes have gone up. Republicans wouldn’t be voting for higher taxes in a post-cliff world, but rather lowering them from the automatically higher rates that would kick in on January 1. While it would allow Republicans to remain ideologically intact, it means the president would start the next round of negotiations having already gotten what he wanted.

    While Republicans complain that the president has been unyielding in his first term, Democrats largely have the opposite view. The conventional wisdom on the left has been that Obama has been a pushover and given away too much in his negotiations with Republicans over taxes and spending.

    Recall the pressure on Obama to unilaterally raise the federal borrowing limit, touching off a Constitutional crisis? The president’s political base has long wished that Obama would simply smash the Republicans and have seen his chief weakness as being too accommodating.

    These are the folks who have been urging the president to force the Republicans to open the negotiations with a huge concession and suggesting that jumping the cliff is not a big deal. Rather than allowing the Republicans to save face and move on past the current impasse, the left wants an auto-da-fe from the GOP.

    Again, it’s not about how much money would be raised. It is about breaking the Republicans.

    So far, the president is giving his base what it wants, and is paving the way for a cliff jump by indicating that he can unilaterally shield taxpayers from the effects and perhaps even hold off on the cuts. Under this scenario, the president would wait for a new, more Democratic Congress, and for heightened anxiety to set in before taking on larger negotiations. He would hold additional power under this scenario because he would be the one dangling the sword on the taxes and cuts – if he could unilaterally delay much of their imposition, one supposes that he could unilaterally impose them whenever he decided that further negotiations were fruitless.

    But that assumes markets and investors can be mollified for the next several months – that the president can convince the financial world that he can pull this all off.

    For now, capitalists are making the same mistakes they usually do when it comes to Washington. First, they assume rational thinking applies and that politicians care more about the economy than political gain.

    Right now, the president is content to tell Republicans that it is his way or the highway on tax rates and it is seen as mere bluster ahead of the final round of negotiations. But if Obama really is serious about refusing to do a deal over what is essentially a semantic, ideological point – that it is not enough for people to pay more taxes, that they must pay at a higher rate – things could get ugly very fast.

    A president who shows that kind of rigidity would scare markets and deepen doubts that a larger deal could eventually be completed.  While a post-cliff Obama might have more leverage since he would have more power and be starting with tax rates already higher, he would be in very poor shape if his brinksmanship kicked off a panic or recession.

    The president was having success cornering Republicans as the narrow ideologues in this debate, but has now made himself the intransigent one. If the economy starts to tumble, Obama’s tax rate gambit has dramatically increased the share of blame he would receive.

    Chris Stirewalt is digital politics editor for Fox News, and his POWER PLAY column appears Monday-Friday on FoxNews.com. Catch Chris Live online daily at 11:30amET  at  http:live.foxnews.com.