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Ponnuru: Republicans’ leverage on tax cuts for the rich

Did you think the election was going to end uncertainty over the course of U.S. economic policy? Dream on. There are several ways the standoff over the “fiscal cliff” – the automatic spending cuts and tax increases set to start in January – could play out.

The first scenario is a Republican surrender. The tax cuts enacted under President George W. Bush expire at the end of the year. Republicans want to extend all of them, while Democrats say only the ones that directly benefit the middle class should continue. Some liberals are hopeful that Republicans will realize they have lost this fight and no longer have leverage: After the start of the year, Democrats will propose re-enacting the middle-class tax cuts and Republicans will agree. Maybe they’ll even agree to it before the year’s end.

They will agree, on this theory, in order to avoid the second scenario: Republicans insist on extending tax cuts for everyone, the parties deadlock, and taxes stay high for everyone. Many liberals think that Republicans would get the blame for that result – and that Republicans know it and will therefore try to avoid it. Republicans may, however, find this scenario more bearable than Democrats think. They may decide that even if middle-class taxes go up, they will be able to say that they tried to prevent it, and it was only Democrats’ insistence on higher taxes for the rich that got in the way.

Republicans will also be able to point to a long list of news stories quoting Democrats to the effect that going over the cliff, and raising taxes on the middle class, would be fine because it would help them get their way.

Republicans may thus have some leverage after all. House Speaker John Boehner certainly seems to think they do. He has said he is willing to let the federal government raise more revenue from rich people by scaling back tax breaks. He is holding out for two conditions: He doesn’t want tax rates to go up, and he wants to reduce the growth of spending on Social Security and Medicare.

If Republicans have leverage, and if Democrats want to avoid middle-class tax increases and any possibility of being blamed for them, then there has to be a real deal. This is the third scenario: The “grand bargain” of Beltway hopes. If it happened, it would be Obama’s biggest bipartisan accomplishment. The odds are against it. The White House has rejected Boehner’s offer, saying that the top tax rates have to go up and a new millionaire surtax be added. It wants twice the revenue that just letting the top rates increase would yield.

Why is Obama demanding so much revenue? Perhaps he wants to use the demand as a bargaining chip. Perhaps he is willing to let negotiations fail and blame the Republicans for the resulting middle-class tax increases. Or perhaps he thinks the Republicans have been neutered by the election and will go along with whatever he wants.

If that’s what he’s thinking, he will probably be disappointed. Republicans seem unlikely to accept steep tax increases on the rich – increases they would have to vote for, not just allow to take place – unless they get entitlement reforms to their liking. That wouldn’t mean just increased copays in Medicare or higher eligibility ages, but something akin to Paul Ryan’s premium-support plan. No way would Obama, who just campaigned hard against that idea, agree to it. Many liberals don’t want to make Medicare and Social Security less generous even to affluent retirees. They fear that making the programs more openly redistributive would undermine public support for them.

The most likely path to a deal involves Obama’s dropping the surtax idea and making some concessions on entitlements. The best bet for what actually happens, though, is gridlock, followed by finger-pointing.

• Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review.

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