Deal or no deal?

There are somewhat conflicting rumors about the status of “fiscal cliff” talks between Harry Reid and Mitch McConnell. Byron York reported that a deal is close, one in which tax rates would rise only for those making $400,000 (or conceivably $500,000) a year and in which there would be a few other cliff-related fixes. But Politico says that there are no signs yet of a breakthrough.

It’s not clear that one would see signs of an impending breakthrough before it occurred. And one can accept as plausible the notion that McConnell might well strike a deal with Reid. For one thing, he’s dealmaker — a modern-day Henry Clay — at heart. In addition, Obama’s plan to have Reid bring the Democrats’ plan — which raises tax rates for those making more than $250,000 a year — to a vote puts McConnell in a box. Facing a reelection battle in 2014, McConnell doesn’t want to filibuster such legislation, and that’s the only way he can block it in the Senate.

To be sure, McConnell also doesn’t want to strike a deal that can’t garner more than de minimis support from House Republicans. Doing so would be viewed as a betrayal and might well subject McConnell to a serious primary challenge. I can imagine that McConnell might consult with his Kentucky colleague Rand Paul as he tries to play his difficult hand. And surely he is consulting with Speaker Boehner.

As I said last night, I’d prefer to see Republicans resist, at least for now, the temptation to strike a deal on taxes that doesn’t also include spending cuts. Although, the deal being discussed wouldn’t lift the spending cuts scheduled to go into place on January 1, those spending cuts are suboptimal. First, they focus excessively on the Defense Department. Second, they don’t involve entitlements. So why not push for improved spending cuts rather than simply caving on taxes?

On the other hand, Republicans will retain leverage on spending cuts because Obama doesn’t like the scheduled cuts and because of the impending debt-ceiling. So a deal on tax rates alone wouldn’t preclude improved spending cuts later on.

The logical outcome of the “fiscal cliff” is that (1) Democrats will get the better of any compromise on taxes because the public favors its position on this issue and (2) Republicans will get the better of any compromise on spending, provided they are not overly daunted by defense cuts, because the public favors its position on spending.

A deal that sets the tax rate increase threshold at $400,000 would fulfill part (1) of this scenario. The White House would give back its ability to increase taxes for those making between $250,000 and $400,000, but would, on balance, be the winner in part because of the resulting divisions among Republicans.

Whether Republicans could fulfill part (2) of the scenario in early 2013 would remain to be seen. Given past history, there is plenty of room for doubt on this score.

Responses