Can Obama breach the Norquist fortress?

Under the watchful eye of Grover Norquist, no Republican has voted to raise taxes since 1990. But a bolder Obama looks determined to use the fiscal cliff to break their pledge, with some success already.

US President Barack Obama sat down for his first interview since winning re-election overnight. The Chicago Democrat decided to take his mandate for higher taxes on top earners out for a spin.

Less than a month after Obama defeated Republican Mitt Romney in a frequently bitter encounter, both sides of American politics have reached a stalemate of sorts over an agreement to reduce spending and increase revenue in order to avert the fiscal cliff scenario. The severity of this scenario, by the way, has been overstated in a big bad way.

Speaking to Bloomberg Television, perhaps a nod to its business-centric audience, President Obama calmly declared that Republicans have absolutely no room to move on the issue of a higher tax rate for the top income bracket. The election settled that.

"If we’re going to raise revenues that are sufficient to balance the very tough cuts that we’ve already made and the further reforms and entitlements that I’m prepared to make, we’re going to have to see the rates on the top 2 per cent go up,” said Obama in relation to individuals on over $US200,000 a year and married couples on $US250,000 a year. "We’re not going to get a deal without it.”

Obama has been campaigning in recent days on this specific point, which from the outset looked awkward. Campaigning again? That doesn’t reflect the confidence of a mandate for your policy, or even that the policy is any good.

But that wasn’t the case in the Bloomberg interview. The US president spoke with an authority and optimism that was lacking during a terribly bruising battle with Romney.

"We are in a very strong position,” Obama announced quietly and reassuringly. "As I travel around the world, it’s fascinating. They all say to me America is actually poised to be the world leader for another century if we can fix some of this political dysfunction.”

But between the American voters and a deal for a new prosperity, Obama has put tax hikes for high incomes earners. The interview showed that he isn't moving from that position.

Obama is correct to play hardball on this point not just because it was a central theme of his election campaign, but that getting Republicans to agree to this condition in any context will be historically significant.

On Monday, Speaker of the House John Boehner released his party’s response to Obama’s plan – of $US1.6 trillion in tax hikes over 10 years, with minuscule spending cuts and a mere pledge to look at entitlement reform more conclusively – with his own party’s offer.

The Republicans rejected Obama’s proposal immediately and for good reason. They control the congress and while America’s rich have done very well over the last two decades, the federal government’s healthcare liabilities are gargantuan. Warren Buffett might be an ally of Obama, but his entire fortune wouldn’t put a dent in the Medicare problem and both sides know it.

Boehner is proposing $US800 billion in new revenue, half that of Obama’s plan, through closing tax loopholes, along with $US1.2 trillion in spending cuts.

The Democrats rejected Boehner’s plan immediately, also for good reason. Eliminating deductions can only realistically secure revenue of about $US400 billion. Cancelling other such deductions, like charitable donations, would inflict too much social damage on the country and amount to political suicide. Both sides know this too.

But the Republican leadership, including Boehner, House majority leader Eric Cantor and House budget chairman Paul Ryan (Romney’s vice presidential nominee) all signed on to a plan that would amount to the first effective tax hike they’ve ever endorsed. As a matter of fact, no Republican in congress has voted to increase taxes on individuals since 1990.

American politics buffs will remember that was the year that then Republican president George H W Bush brought himself undone by famously stating "Read my lips: No new taxes”, only to give that point away a few months later.

It was out of the negative reaction to this backflip that Grover Norquist, founder of Americans for Tax Reform, actually became an influential voice in American tax policy. Norquist’s organisation, through the pledges it has gathered from Republicans not to hike taxes in any way, has gained serious notoriety only recently. It’s actually been around since the mid-1980s.

This underlines the scale of the concession Obama is asking Republicans to make, at least in their minds. The Republicans might be giving outward signals of giving ground on revenue raising, as they well should, but this doesn’t make it less of a deal for them, or their electorates for that matter.

The president held the tiniest of carrots out to his political antagonists in the interview. He said that the Bush tax cuts for the top 2 per cent would have to rise from 35 per cent, while leaving the door open on what percentage that would be to.

Many onlookers are maddened by the apparent callousness the president and Boehner are showing, chiefly because the US debt rating was downgraded by Standard & Poor’s the last time these two guys stuffed up a deal. Americans are wondering whether history can possibly repeat itself given the gravity of the presidential election campaign – which was years in the making and endlessly tedious – that finished just 28 days ago.

Remember, S&P’s was specifically angered by the fact that Washington had exhausted "extraordinary measures” to avoid hitting its own congressionally mandated debt ceiling and went within a hair’s breadth of defaulting on its obligations. International investors were happy to lend the US government funds at record low rates. This remains the case; S&P’s primary concern was Washington’s recklessness over its international obligations.

The US is due to hit its debt ceiling again in the last week of December, but those same extraordinary measures could and probably will push that deadline out until March. While the debt ceiling problem is wrapped up in the fiscal cliff discussion, it doesn’t become a live issue on January 1.

Meanwhile, the expiry of the Bush era tax cuts would not take effect in practice until April 15, when Americans file their returns. The sequestration – mandatory spending cuts to government departments – would similarly not be a New Year's Eve issue.

Going over the fiscal cliff however does speak to the credibility of the American political system, which is relevant to the confidence of international investors that lend the US money, the American consumers that drive its gradually recovering economy and the companies that employ them.

It’s far from certain that either the Democrats or Republicans are prepared to take the plunge. What is certain is that Obama and Boehner are not prepared to give much away, without some early concessions from each other, with less than four weeks to go.

Alexander Liddington-Cox is Business Spectator's North America Corespondent.

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