PILLOW TALK



On the surface, the debating points seem simple enough.

Democrats argue that what has gotten us to this point - namely, rate reductions for the rich introduced under President Bush 12 years ago - were meant to be temporary and reversible. Meanwhile, well-off Americans have done extremely well over this period, both in absolute terms and relative to other Americans. And they now need to be an integral part of improved fiscal responsibility.

Republicans stress different points. They feel that increasing the rates on high earners would dis-incentivize innovation, entrepreneurship and risk taking. They argue that this would undermine the country's already sluggish growth and employment engines. And this would endanger the quest for medium-term fiscal sustainability.

Both parties are sticking to their views with utter conviction - and in a manner that, to a rational outsider, would seem excessive given the foundations of the arguments. These are simply not solid enough to make the top rates the overriding single issue of the fiscal cliff debate and, more broadly, the country's fiscal challenges. Yet it is, and for understandable reasons.

For Democrats, this issue captures well much deeper (and wider) concerns about inequality of income, wealth and opportunities. Fairer burden sharing and proper collective responsibilities are the topics du jour.

For Republicans, it speaks to limiting the size and scope of government. They see an urgent need to counter what some have even gone as far as to label "creeping socialism." And there is nothing like the S word to mobilize the Republican base.

With these types of considerations anchoring the two extremes of the debate, timely and proper resolution becomes a tricky proposition. You see, for all the rancor and tangents, what we are witnessing on Capitol Hill is essentially quite a balanced debate. Or so it seems... However, this is the case if, and only if, the two views are considered in strict isolation of a much larger macro framework.

WHY DEMOCRATS WILL WIN



When placed into the larger context of America's challenges, the Democratic view prevails. But before they celebrate what is likely to end up going their way, they should realize that this would prove a shallow victory if it is not followed up by a more holistic approach to re-invigorating the U.S. economy.

Republicans' dis-incentive arguments about taxing the rich would apply if the country was starting from much higher tax rates. It is not. Similarly for the rate on dividend income and for how carried interest is treated. Moreover, most in the party have already yielded on the need to raise additional tax revenue from the richest Americans by signaling that they would agree to limits on deductions (that, currently, disproportionately benefit this fortunate group).