The Politics and Pragmatism of Extending Bush Tax Cuts

July 27th, 2010

Jonathan Chaitt has an interesting piece on the politics of extending the Bush Tax cuts in yesterday’s New Republic.

All of the Bush income tax cuts are scheduled to expire at the end of this year under current law and Barack Obama (along with most Democrats) support letting the taxes on the top 2% expire while leaving the cuts for 98% of Americans in place. Chaitt argues that, politically, this is a slam dunk for the Democrats since Americans overwhelmingly support increased taxes on the wealthy.

His article discussses the strategy proposed  by a number of Democrats, whereby the Senate would put extending the cuts for middle-class and the poor on the table and dare the Republican’s to filibuster it. If they can get Republicans to agree to middle class tax cuts, they’ll get their agenda. If not, tax cuts will expire for everyone and the Democrats can run  a campaign on how the Republican’s refused to allow the tax cuts to be voted upon because they wanted tax cuts for the rich. While Republicans would lament losing the tax cuts for the rich, neither party would particularly bemoan the loss of middle class tax cuts since neither one particularly wanted them, according to Chaitt. 

There are a number of problems here. First of all, it’s not a strategy without risk, because it assumes that the Democrats will be rewarded for Republican obstructionism instead of blamed for not being able to get anything done even though they have 59 votes in the Senate. Second of all, it’s not clear that the Democrats have the votes for this strategy and a number of their members have expressed doubts about allowing the tax cuts to expire during the largest recession since the Great Depression. Given that Harry Reid has not once in the past two years asked Republicans to actually fillibuster (Mr Smith Goes to Washingtn style) instead of just hold votes to close debate, it seems unlikely that he would force 4 or more Democrats to actually bring out the cots and spend the night on the floor defending tax cuts for the rich. However, nothing focuses the mind like a hanging and perhaps Harry will start acting like his career depends on showing some grit (since it does).

More important than these political issues are the economic and fiscal issues. As I’ve argued before, I think that pretty much all of these tax cuts are irresponsible given the budget deficits we face. However, I also believe that the economy is in a precarious position and needs the short-term stimulus. 

I would be okay with the following: leave all of the tax cuts in place for another year and set them to sunset at the end of 2011. According to CBO, this would cost about $110 billion for the year.  This insures that, if nothing is done, the cuts will expire, so no matter who controls Congress, there will be no chance that President Obama will be stuck with tax cuts for the rich if he doesn’t want them. By 2011, the Deficit Reduction Commission will have reported it’s recommendations, hopefully the recession will have eased slighltly and (again hopefully) the political debate will have shifted to a more serious discussion of the fiscal disaster looming. I may be overstating the impact of the deficit reduction panel, but I think it will be a game changer. I’m not positive that Obama will feel he has enough cover to abandon his pledge not to increase taxes on the middle class, but certainly this is a possibility.

Perhaps as part of a bargain for a temporary extention of the tax cuts and negotiations over the Estate Tax, the Administration can also get some of the additional stimulus programs that they have been pushing, including tax breaks for business and aid for teachers.

The worst outcome would, in my opinion, would be for the politicians to put these tax increases off indefinitely. This would send the unmistakable signal that, once again, the politicians are refusing to make the tough decisions to put our fiscal house in order in the long term.

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2 Responses to “The Politics and Pragmatism of Extending Bush Tax Cuts”

  1. Pete Carnival (NY-R) Says:

    Phil, the Bush tax cuts generated a great deal of economic activity. Running for re-election, Bush got more votes than anybody in history. His problem was spending. The economy didn’t start to turn sour until 2006.

    Where is your uncle?

  2. Milazz Says:

    Funny Pete, my uncle and I were having the exact same argument last week and he made the same points as you, even going so far as to argue (as many Republicans have) that the tax cuts came close to (or may have even) paid for themselves

    Couple of points here:

    Whether the Bush tax cuts “generated a great deal of economic activity” is not the point. When you pump stimulus into the economy (whether that’s in tax cuts or in govt. spending) you get some return on your money. During 8 years of Bush, we did both. The economy was good for a few years there. Not a big surprise.

    “The point” is that it blew a huge hole in the budget. Despite Republican arguments to the contrary, even the most conservative experts say that the Bush tax cuts added $1.4 trillion to the deficit in a ten year period (liberals experts have said $1.8 trillion).

    Extending those tax cuts for another 10 years would cost $3.1 trillion.

    If the Republicans really believe in balancing budgets, how can they recommend something so irresponsible without a plan to cut $3.1 trillion of spending and then another $9 trillion on top of that so that they can eliminate the out of control deficits that they are claiming Obama is wholly responsible for?

    The answer is simple. They don’t really believe in balancing budghets. They just want tax cuts.

    I wish we could live in a magical land where the cost of maintaining an empire as well as the lamest welfare state in the industrialized world could be financed with lolipops and everyone could pay low taxes while keeping the same benefits.

    Unfortunately, you and I both have to live in this world, where there are trade offs.