Tax Deal Debate: What If There Were No Deal?

Jon Chait shows two graphs being circulated that demonstrate the initial cost of the tax deal (where the Democrats come off pretty well) and the long-term cost if the temporary extensions of Bush tax policy turn out not to be temporary (where the Republicans come off pretty well). While that certainly captures the dynamics of the dealmakers, it's a problematic analysis because it avoids addressing the issue of whether the White House could have done anything now to stop the extensions today -- let's take up the counterfactual.

Sure, the president could have stymied the legislative process and seen the tax code revert back to Clinton-era rates -- Democratic leaders in Congress weren't able to separate out the middle-class cuts from the upper-income cuts. That would have led to Republicans coming in and forcing the extensions next year at a disadvantage to Democrats, and also, little opportunity to get more fiscal stimulus into the system. I'd like to see a graph that shows what happens when the Republicans get their way regardless, thanks largely to Democratic intransigence in the Senate, and no fiscal stimulus appears.

Given the failure of congressional Democrats before and after the election to effectively separate middle- and upper-income tax policy, Obama faced a decision between breaking his promise to raise taxes on the wealthy and breaking his promise to keep taxes low on the middle class and try to grow the economy. It still seems like he broke the right promise.

-- Tim Fernholz

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