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Obama’s “Tell” In Fiscal Cliff Negotiations

Experienced negotiators, and poker players, always look for the opponent’s “tell” -- that one little blink or tic that helps them see through the opponent’s deception to reveal what the opponent is really thinking or what cards he really holds.

ObamaFor those Republicans who thought Obama was actually serious about avoiding the government’s “fiscal cliff,” he just blinked and revealed his cards – and they show a hand that Democrats have held before and know how to play to entice Republicans into making a sucker bet.

What Obama said to reveal his hand was that Congress should pass his tax increase plan now and hold-off on making any decisions on spending cuts until next year.

To Capitol Hill’s establishment Republican politicians, never eager in the first place to make the hard choices involved in reducing spending, this sounded like manna from Heaven: an opportunity to pass a tax increase they see as inevitable, while looking reasonable and kicking the can down the road on cutting spending.

This is a sucker bet that got Republicans skunked when they raised taxes and President George H.W. Bush went back on his “read my lips, no new taxes” pledge.

And it is a sucker bet that even President Ronald Reagan, with all his political skill, took to his regret.

As President Reagan’s former Attorney General, Edwin Meese III, and Heritage Action for America’s Michael Needham wrote in USA Today:


The president [Reagan] had no interest in increasing taxes, but he agreed to consider some kind of compromise with Congress. His representatives began meeting with members of House Speaker Tip O’Neill’s team to find some way to hammer out a deficit-reduction pact. So began what, in our opinion, became the ‘Debacle of 1982’.”

“From the outset, the basic idea of the GOP participants was to trade some kind of concessions on the tax front for a Democratic agreement on spending cutbacks. The negotiators knew that Ronald Reagan would be hard to sell on any tax hikes. So they included a ploy they felt might overcome his resistance: a large reduction in federal spending in return for a modest rise in business (but not individual) taxes.”

“The ratio in the final deal — the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) — was $3 in spending cuts for every $1 in tax increases. It sounded persuasive at the time. Believing it to be the only way to get spending under control, most of the president’s colleagues signed on. He disliked the tax hikes, of course, but he agreed to it as well.”

“You don’t have to be a Washington veteran to predict what happened next. The tax increases were promptly enacted — Congress had no problem accepting that part of the deal — but the promised budget cuts never materialized. After the tax bill passed, some legislators of both parties even claimed that there had been no real commitment to the 3-to-1 ratio.

 

Did the higher taxes help bring down the deficit?

Nope.

Meese and Needham write that “spending for fiscal year 1983 was some $48 billion higher than the budget targets, and no progress was made in lowering the deficit. Even tax receipts for that year went down -- a lingering effect of the recession, which the additional business taxes did nothing to redress.”

As Stephen Moore and Richard Vedder pointed out in “Higher Taxes Won’t Reduce the Deficit,” an article in The Wall Street Journal that every member of Congress should read, congressional spending always expands to consume the revenue available. Over the long run, spending never goes down.

Moore and Vedder “found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in – and a little bit more.”

Obama has signaled he’s holding the same hand that Democrats House Speaker Tip O’Neil and Senator George Mitchell held when they suckered Republicans into making a losing bet on trading tax hikes now for spending cuts some time off in the future. The question now is whether Capitol Hill Republicans will be dumb enough to take that bet again, or whether they will finally call Obama to see whether or not he is bluffing.