Seven years ago, Republicans started a timer on a political bomb called the Jobs and Growth Tax Relief Reconciliation Act of 2003. The timer goes off in about 142 days, when the law -- better known as the Bush tax cuts -- is set to expire.
Failure to take any action will lead to across-the-board hikes back to the not-very-draconian levels of the Clinton administration. With political incentives and policy goals conflicting, the Democratic majority has a very fine line to walk -- and some very skittish moderates to corral -- if they want to split the baby on this one. The GOP probably didn't anticipate their political timing would be this good, but their election strategy of obstruction may finally have some positive consequences if filibuster attempts make legislating impossible and the cuts are automatically rolled back.
Inaction is a very real possibility: Republican attempts to stay last year's expiration of the estate tax cut ended in Senate gridlock. The tax has been repealed for a year but will automatically return next year with higher rates for the wealthy.
A similar inability to comprise this year will lead to a victory for (honest) budget hawks: Allowing the Bush tax cuts to lapse will reduce the deficit by about $300 billion each year, assuming no additional spending -- and using some of that money to stimulate a badly trending economy might be a sound idea. While increasing the tax burden across the board isn't popular, a bigger problem during a recession is that the country needs all the spending it can (responsibly) wring from the middle class. In the long-term, however, there's not much evidence that letting the Bush tax cuts expire will hurt growth.
President Barack Obama -- who promised not to raise taxes on anyone making less than $250,000 -- and congressional Democrats generally favor keeping the more expensive cuts targeted at the middle class while nixing those affecting the upper brackets. Republicans think making all the cuts permanent is the right path, and their vociferous arguments may be swaying moderate Democrats like Evan Bayh and Ben Nelson, who talk a good game on deficit reduction but fear being labeled as tax-raisers. That dynamic could lead to a kick-the-can-down-the-road mentality that extends all the tax cuts for another year or two before taking up the issue again.
That sort of compromise would be a mistake. As Treasury Secretary Tim Geithner recently explained, the administration hopes to do a number of things by raising the upper-bracket tax rates. One is to restore some fairness to the tax code, another is to shore up the budget, but an important third is signaling that the United States has the wherewithal to make the, yes, I'm going to trot out the cliché, hard decisions about governing, which will support its short-term borrowing ability.
Republicans seem to be signally focused on the politics. House Republican Whip Eric Cantor has a countdown on his website to "Democrat tax hikes," even though the hikes come as a result of the 2003 Republicans' decision not to pay for their tax cuts. Republican Leader John Boehner spent Sunday on NBC stumbling around the question of why his caucus couldn't support unemployment benefits due to deficit concerns but was right on message when it came to protecting the wealthy from deficit-busting tax hikes.
Republicans and their allies are also arguing, falsely, that Democrats support rolling back all of the Bush tax cuts and are suggesting that the White House wants to reduce the child tax credit. The opposite is true, and Obama has already offered an early compromise to his critics by limiting increases in capital gains and dividend taxes.
Republicans also say that the upper-income tax cuts represent needed stimulus. Again, it's not true: tax cuts for the wealthy aren't liable to lead to higher consumption spending -- other forms of stimulus are cheaper and more effective. The idea that rolling back the upper-income tax cuts will hurt small business has also been knocked back by the Center on Budget and Policy Priorities, which finds that most "small businesses" affected by the law are wealthy individuals filing taxes as businesses.
Even conservatives are surprised by the lack of responsibility among Republicans, with former Reagan official David Stockman saying that the congressional GOP is "utterly disingenuous" for adopting discredited supply-side policies even as he levels charges of irresponsibility against the White House for its Keynesian borrowing.
For once, the best-case scenario may be Senate gridlock that leads to the end of all the Bush tax cuts. That would force Obama to break a no-tax-increase pledge he probably shouldn't have made and restore revenue policy to a place that would give both parties an incentive to talk about actual tax reform -- and perhaps room to spend on additional fiscal stimulus. Republicans will call it a Democratic tax hike, but that rhetoric is coming out no matter the policies of the Democrats, who will have a credible case that the hikes are the result of the GOP's reluctance to compromise.
It would be a happy day for Democrats if they hold their caucus together to extend the middle-class tax cuts; while it solves the problems of neither the tax code nor the budget, it shows that Democrats can keep their promises and take steps toward shoring up the budget. Even as Republicans assault them politically, Democrats have a retort for this attack, too: They won't let the GOP hold the middle-class tax cuts "hostage" to make sure the wealthy keep their low rates.
If the vague plans to extend all the Bush tax cuts for one, two, or three years now being discussed in the Senate catch on, though, it will be the worst possible outcome: Neither economic growth nor responsible budgeting will be served, just the regular bowing and scraping to the false idol of tax cuts for the wealthy.
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