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Everybody Was Freaking Out Over the Fiscal Cliff Tuesday. Here's Why.

The most prominent "fiscal cliff" development on Tuesday was House Speaker John Boehner’s decision to introduce what he calls “Plan B.” The most interesting development was the liberal reaction to President Obama’s negotiating posture. Both deserve some attention, because both are going to shape the final deal.

First, Boehner’s Plan B: As you may recall, Boehner and President Obama had spent the previous few days exchanging offers on how to avoid the “fiscal cliff”—the set of automatic tax increases and spending cuts set to take effect on January 1. On Tuesday, Boehner announced that Obama’s latest offer was still more than he, or his fellow House Republicans, could contemplate. Rather than wait for negotiations to produce a deal, Boehner said, he would put forward a bill that would extend the Bush tax cuts affecting incomes below $1 million. That way, he said, the middle class would know it’s getting a tax break, even as he and the president continued talking about how to reach a more wide-ranging deal.

Congressional Democrats say they would vote against such a proposal and President Obama has made clear that he would veto it. That response is altogether proper. Allowing tax rates on incomes above $1 million to rise is the same thing as allowing tax breaks on incomes below $1 million to remain where they are now, at levels set by the Bush tax cuts. Such a change would lock in place large tax breaks for the wealthy; remember, they would still get tax relief on the first million dollars of their incomes. And it would generate somewhere between $250 and $450 billion in revenue, give or take, depending on the structure. That’s a lot less than the $1.2 trillion Obama is now seeking.

Of course, Plan B may never get out of the House. Given the strong Democratic opposition, Boehner presumably needs most of his caucus to vote for the bill. But plenty of Republicans still refuse to vote for any bill that results in higher taxes on the wealthy, either because they oppose the idea on principle, fear a primary challenge from the right, or some combination of the two. Boehner himself may not know how much support he has.

Now, onto Obama’s latest proposal—and the reaction it provoked on the left.

Until Monday, Obama had held a pretty firm position in negotiations: In addition to requesting the revenue, which he originally pegged at $1.6 trillion; and while he was willing to cut spending, he wanted to spare the beneficiaries of programs. But on Monday, “knowledgeable sources” began telling reporters that Obama was making some concessions—not only reducing his revenue request, to the $1.2 trillion, but condoning larger spending cuts, including a change in the benefit formula for Social Security. That last part made liberals absolutely furious: sent an alert to members, calling the idea "a betrayal." On Capitol Hill, Senator Dick Durbin said, in an interview with the Washington Post's Greg Sargent, that he was strongly opposed to adjusting Social Security benefits—although he stopped just short of ruling it out.

Would a shift in the Social Security formula really be so objectionable on the merits? Opponents say that, whatever the technical justifications, such a shift would reduce benefits for seniors. These critics know that the administration has promised to protect the poorest, weakest, and oldest seniors by adjusting the formula; the problem, the critics say, is that the adjustments won’t fully offset the benefit cut. In response, proponents of the idea say…well, they say pretty much the same thing. They acknowledge that it’s benefit cut, even with protections for the most vulnerable seniors. They say it’s not something they particular want to do. Rather, they say it’s something they have to do—or, at the very least, something that is worth doing—in order to get a better deal.

Among those who seem to hold the latter view, notably, is House Minority Leader Nancy Pelosi. During an interview with MSNBC's Andrea Mitchell on Tuesday, Pelosi reiterated her strong objection to raising the Medicare age, another idea that Republicans have proposed. When Mitchell asked Pelosi whether the Social Security adjustment should also be a deal-breaker, Pelosi changed the subject. Keep in mind that, given the position of extremist Republicans, Boehner probably can't get a bill out of the House without substantial support from Democrats. That means he probably can't get a bill out of the House without support from Pelosi.

One reason Pelosi and other Democratic insiders are holding fire may be an appreciation for some elements of Obama's proposal that have not received much attention, even though they are important. Among those are the "refundables," which sounds like the name of a lounge band from the 1970s but is actually a series of initiatives that do a lot to help low- and middle-income Americans. On January 1, if nothing happens, three of these measures will expire: the Earned Income Tax Credit, which provides extra cash to working families; an expansion of the Child Tax Credit, which subsidizes families with kids; and the American Opportunity Tax Credit, which assists people paying for college tuition. Obama’s proposal calls for renewing all of them permanently. Together, these measures would represent about $250 billion in total expenditures over ten years. 

That’s a big deal, and not just in sheer dollars. The Child Tax Credit is, as Elaine Maag of the Tax Policy Center put it, "a key piece of the safety net for low- and moderate-income families." The White House figures that, on average, these credits expiring credits are worth about $1000 to about 25 million families—families that are, by and large, precisely the people whom government should be helping. But the provisions have draw strong criticism from conservatives because, supposedly, they are making Americans too dependent on government. (The evidence suggests otherwise. As a briefing from the Center on Budget and Policy Priorities correctly notes, "Studies have found that the EITC encourages work, reduces poverty, helps families meet basic needs, and improves children’s achievement in school and likely increases their earnings as adults.") 

Renewing the refundables would certainly strengthen the case for passing something like Obama's proposal. It would not necessarily clinch it. The cut to Social Security really would hurt a lot of people; that’s why liberals like Paul Krugman say they are “agonizing” over whether it’s worth the potential trade-offs. At Slate, Matthew Yglesias has pointed out, correctly, that raising revenue may not be as valuable as it seems, given that efforts to raise revenue in the 1990s merely gave George W. Bush a chance to give that money to the wealthy, at tax cuts. Here at TNR, my colleague Noam Scheiber has made an extremely compelling case that forcing Republicans to capitulate—or to suffer the political consequences of going over the fiscal cliff—is essential to break the will of the party’s extremist wing.

That last point looms larger in my mind the more I think about it. As recently as a few days ago, the administration was refusing to negotiate with Republicans about the debt ceiling. If Boehner or one of his lieutenants called about the debt ceiling, administration sources were saying, Obama wouldn’t pick up the phone. Then Boehner made his offer merely to push back the debt ceiling by one year, so he could maintain true to the Republican Party’s newly established position—that the government could borrow more money only to the extent that it cut spending. The administration, along with plenty of its allies, is taking this idea seriously. It's hard to understand.

This much is clear: A deal with further concessions would be ever harder to stomach. That alone is good reason for liberals to keep screaming, even if parts of the proposal deserve cheering.