The Fiscal-Cliff Battle Is Already Over, and the Republicans Have Won It

Democrats have almost totally surrendered after decades of debate on tax rates. But the GOP has also conceded on entitlements. Are the sides too close to make a deal?
Lyndon Johnson, shown signing the Medicare bill with Harry Truman, would be perplexed by today's political battle. (Wikimedia Commons)

There was a time (1994) when Democrats decried the child tax credit and ending the so-called marriage penalty as tax cuts for the rich. Now they are party orthodoxy.

There was a time (2001) when Democrats considered not "paying for" the Bush tax cuts for those earning less than $250,000 in adjusted gross income as too extravagant. Now extending them permanently is imperative.

There was a time (2011) when House Republicans said that transforming Medicare from its fee-for-service model to a lump-sum voucher, or "premium support," system was the only road to continued solvency and efficiency. That idea has vanished from the fiscal-cliff talks.

There was a time (2011) when Republicans argued that governors had to have Medicaid funds given to them in the form of block grants. This would also, Republicans forcefully argued, save money and achieve efficiency. Like vouchers, Medicaid block grants have scampered from the cliff.

In ways inconceivable to Republicans of the 1970s, 1980s, and 1990s, Democrats have embraced almost all of their economic arguments about tax cuts. Back then, sizable swaths of the Democratic Party sought to protect higher tax rates for all. Many opposed President Reagan's 1981 across-the-board tax cuts and the indexing of tax brackets for inflation. Many were skeptical of Reagan's 1986 tax reform that consolidated 15 tax brackets into three and lowered the top marginal rate from 50 percent to 28 percent (with a "bubble rate" of 33 percent for some taxpayers). They despised the expanded child tax credit and marriage-penalty relief called for under the GOP's Contract With America.

Now all of that is embedded in Democratic economic theory and political strategy. The only taxes that the most progressive Democratic president since Lyndon Johnson wants to raise are those affecting couples earning more than $267,600 and individuals earning more than $213,600 (these are the 2013 indexed amounts from President Obama's 2009 proposal of $250,000 for couples and $200,000 for individuals). Yes, some of this increase would hit some small businesses. But that can be finessed.

The larger point is that Republicans are pushing on an open door on taxes. The GOP has won nine-tenths of the tax argument. It just hasn't figured out what do with victory.

This is especially true if, as Democrats suggest, there would be a trade of some structural reforms to Medicare and Medicaid in exchange for raising marginal tax rates on top earners.

Democrats can have this discussion with Republicans because voucherizing Medicare and block granting Medicaid are no longer on the negotiating table. These are huge policy concessions from Republicans, largely unappreciated and underreported in CliffsNotes coverage of the cliff. Republicans in the House and Senate had marched in lockstep on behalf of both policy changes -- stepping straight into political sniper fire as they did. But no more.

Democrats have won nine-tenths of the Medicare and Medicaid debate. Like the GOP with taxes, they just haven't figured out how to take yes for an answer.

Because no one appears to know how to win or to even recognize that they have won, the country is likely to avert the fiscal cliff -- but just barely. The stalemate in the talks is real. The vibrations between Obama and House Speaker John Boehner are upbeat, but the detail work at the staff level gets quickly bogged down over policy, numbers, and politics.

That means the deal that emerges will be small -- puny, actually. Its dimensions shrink by the day and the most effective recycling program will soon involve kick-the-can metaphors.

There will be some deal on raising marginal tax rates, delaying the scheduled cut in Medicare payments to physicians (under the Sustainable Growth Rate), and allocating some -- probably $10 billion to $15 billion -- of the pending $60.4 billion request for Hurricane Sandy relief and recovery. This minuscule bill will likely be merged with a "framework" bill that will be intoxicatingly aspirational. It will seek tax reform and entitlement reform. And you read it here first: The arguing over what those reforms will and won't touch, how much they will cut, and by when will become as intense as anything this debate has seen so far. The framework will be a hybrid of the Budget Control Act and will incorporate goals even more extravagant than those the super committee envisioned. What becomes of this framework in the drafting and the legislative implementation in 2013 is the real ballgame.

But the debate on the framework can't occur until the small-ball is finished. And neither can be dealt with until both sides learn how to embrace victory, push on the open door, and lead the country to a different place.