Obama would drive over fiscal cliff is no tax hike on wealthy: Republicans blink?

According to Treasury Secretary Timothy Geithner Obama is definitely prepared to let the economy go over the fiscal cliff unless he achieves a budget deal that has higher rates for top income earners.

In an interview with CNBC on Wednesday December 5th, Geithner said:

"There's no prospect in an agreement that doesn't involve those rates going up on the top two per cent of the wealthiest Americans."

Republican Orrin Hatch responded angrily:

"This is one of the most stunning and irresponsible statements I've heard in some time. Going over the fiscal cliff will put our economy, jobs, people's paychecks and retirement at risk, but that is what the White House wants, according to Secretary Geithner, if they don't get their way."

Going over the fiscal cliff would ensure very large spending cuts, something that the Republicans strongly favor. Taxes would simply revert to what they were before Bush cut them and this would increase revenue. Both Republicans and Democrats worry that the cuts and tax increases would send the U.S. economy back into recession. A concern not mentioned is that there would be large cuts in the defense budget. Obama and Boehner talked by phone on Wednesday but there were no compromises offered in public. There was no talk of a meeting between the two either, a move requested by Republican House leader Eric Cantor. I find it surprising that the Republicans are still maintaining that they will not agree to tax hikes on the rich. Their stand is not politically popular and it should be clear that Obama will not deal unless they give in on the issue. Perhaps, they think, that because in the past Obama has caved that he will do so again. This time around, however, Obama has nothing to lose by sticking to his position. Not only is his position popular but if a deal is not reached and the U.S. goes over the fiscal cliff, most people will blame the Republicans. As it is, the Republicans can probably get quite significant cuts to entitlement programs if they agree to the tax rate hike for the rich. Obama told The Business Roundtable in Washington:

"If we can get the leadership on the Republican side to take that framework, to acknowledge that reality, then the numbers actually aren't that far apart.Another way of putting this is we can probably solve this in about a week. It's not that tough, but we need that conceptual breakthrough.".

If the tax rate hike was all that the Democrats were demanding, perhaps a deal might be made already but they are demanding also an increase in the borrowing limit. The Democrats want to avoid another confrontation on this issue early next year. Geithner said:

"We are not prepared to have the American economy held hostage to periodic threats that Republicans will force the country to default on our obligations.That would be a terrible thing for the financial security of the average American, for businesses, for confidence around the world and the United States."

In spite of the intransigence of both sides Geithner was still optimistic that a deal could be made and the outlines of a deal were becoming clearer. Geithner said that both sides were making progress in agreeing to a deal to avoid the cliff. The real issue, I expect, is how much the Republicans think that they can get in spending cuts, especially to entitlement programs, in return for finally giving in on the tax issue. The Democrats may need to leave the debt ceiling solution until later. UPDATE: A leading Republican hawk has caved on the tax rate hike. Boehner surely will now also:

Republican Sen. Tom Coburn, a leading deficit hawk, said Wednesday he would support higher tax rates on wealthier Americans as part of a broader deal with President Barack Obama and congressional Democrats to avoid the crisis.