Why President Will Go Over the Fiscal Cliff Rather than Compromise on Tax Rates

As I write, Drudge is leading with Treasury Secretary Timothy Geithner’s vow that the administration is “absolutely” ready to take the government over the fiscal cliff unless, quoting the story (from CNBC), “tax rates increase on the top 2 percent of wage earners.”

But the House GOP has already conceded higher taxes on the wealth. They just want to get the money through lowering deductions, not upping the top marginal rate. They calculate that the two methods can reap roughly equal revenues. The GOP wants to keep rates low is so as not stifle new business creation and growth, which for a variety of reasons is highly sensitive to personal tax rates. The products of the entrepreneurial renaissance that started in the late 1970s or early 1980s have created all the net new jobs in the U.S. over the past three decades. The GOP wants to reenergize that sector, not stifle it. A sensible strategy.

So having won on revenues from the rich, why doesn’t the White House declare victory and go home? Here is my answer, from my weekly column:

Some believe [the reason for the administration’s obsession with revenue from the rich through higher rates not lower deductions] is political. They contend the president wants to take the government over the fiscal cliff, which, thanks to media protection, he can get away with. Then he can blame Republicans for the financial chaos and universal tax hikes that follow, force a complete GOP surrender and take back the House at the next election. How about this as an explanation though? He wants exactly the opposite of what Republicans want – and does so not out of pride or economic ignorance, but for the simplest and most direct of political motives – a key constituency wants it. The constituency I have in mind is organized labor and the motive would be to put a break on the very entrepreneurial renaissance that Republicans so prize. During the George W. Bush years, I proposed to a senior administration official – a board member of a major regulatory agency – that labor’s agenda was not all it seemed. I argued that labor was aggressively targeting the entrepreneurial small and medium-sized business sector, working to put it on the endangered species list. To my surprise he responded that he had wondered why the unions had weighed in aggressively on an issue before his commission on which they had no apparent interest. Desire to slowdown new business creation and expansion would explain it, he said. But why? Why should labor go after the major source of American job creation? It has to do with the simple, classic approach of unions to all competition: stop it. Here is the business problem, if you will, for the leaders of the U.S. labor movement. They are losing market share. They talk a lot about jobs – meaning union jobs – moving overseas. But at least as big an issue for them is the American entrepreneurial renaissance. By and large, the workers of the rising economy have rejected the movement’s attempts to organize them. And in industry after industry, these new and energetic non-union firms have been expanding at the expense of old unionized ones. In other words, one of the president’s major sources of support sees America’s entrepreneurial renaissance as competition and wants to, if not stop it, slow it drastically down. Just to be clear, I am NOT saying this is the president’s motivation. I am suggesting it is the motive of key parts of the union movement. Mr. Obama is just, as they say in this town, dancing with the one that brung him.