JANUARY 27, 2011
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The deficit is a huge dilemma that’s too big for one party to solve, say the pundits and various deficit scolds. (Alan Simpson and Erskine Bowles: “Neither party can fix this problem on its own, and both parties have a responsibility to do their part.) Nonsense, I say. There’s a really easy, and 100 percent partisan, answer: Just let all the Bush tax cuts expire. President Obama can accomplish this without negotiations, compromise of any sort, or even putting aside petty agendas for the national good. The solution is hiding in plain sight.
The reason it’s hiding, of course, is that Obama has repeatedly promised, first as a presidential candidate and then as president, to keep in place the Bush tax cuts on income under $250,000 a year. Since Republicans also endorse those tax cuts, everybody assumes they’ll continue indefinitely. Everybody may be wrong.
First of all, President Obama—any young children or innocent adults still clutching their inaugural ticket should probably stop reading right now—does not really want to continue any of the Bush tax cuts. How do I know this? Because nobody who shares Obama’s beliefs about domestic or economic policy wants to continue the Bush tax cuts. I hate to spoil anybody’s pleasant delusions, but Obama agreed to extend the Bush tax cuts on income under $250,000 because he wanted to get elected president. Also he probably still sneaks the occasional cigarette. Sorry.
So Obama is stuck with a promise he doesn’t want to keep. Fortunately for him, the Republicans don’t want to keep it, either. How do I know that? Because conservatives who don’t have to run for elected office admit it. Alan Viard of the conservative American Enterprise Institute (and formerly of the Bush administration) recently wrote that extending just the tax cuts for income under $250,000 a year “would increase the deficit while reducing incentives for earning income, saving, and investing.” Tax cuts for the middle class—while perhaps necessary to make tax cuts for the rich politically palatable—are merely the price of admission. Viard, recalling that George W. Bush used middle-class tax cuts to sell tax cuts for the rich, notes, “From a short-run political perspective, the focus on increasing disposable income [i.e., middle-class tax cuts] worked, helping secure the passage of the tax cut, including its marginal rate reductions [i.e., upper-bracket tax cuts].”
Republicans who have to face voters tend to phrase it a bit more obliquely. John Thune, the senator, potential presidential candidate, and apostle of GOP establishmentarianism, asserts that the best way to spur economic growth is “to allow the people who create the jobs in this country, the people who make more than $250,000, to continue to do well.” Republicans express frequent concern about the fact that large numbers of taxpayers have little or no income tax burden and that the richest 1 percent is paying a higher share of the tax burden. The Republicans’ view was revealed in their negotiations last fall over the expiration of the Bush tax cuts. They didn’t treat Obama’s offer to extend only the tax cuts on income under $250,000 as half a loaf. They treated it as totally unacceptable.
Republicans gave Obama the choice of extending all the tax cuts or extending none of them. Since the economy remains extremely fragile, and Obama didn’t want to risk the recovery in the approach to his reelection (sorry for the cynicism, kids), he agreed to extend all the tax cuts through 2012. He also got an extension of unemployment benefits plus a cut in the payroll tax, which benefits middle-class workers, as part of the deal.
But what happens at the end of 2012? Well, the economy should be two years further along into a recovery. And Obama’s reelection will be behind him. At that point, his choice is easy. All he has to do is refuse to extend the tax cuts on income over $250,000 a year. He can say he favors a tax cut for income under that level, but he won’t have to follow through on that pledge, because Republicans will never agree to pass a tax cut only on income under $250,000. In a hostage standoff where one party secretly hates the hostage and the other party is at best indifferent to the hostage, then the hostage is probably going to die. End result: All the Bush tax cuts disappear starting in 2013.
Obama could blame Republicans for letting taxes go up on the hard-working middle class. (Hey—he wanted to extend them!) But their expiration would be a huge policy boon. It would slice $3.9 trillion off the national debt by 2020. How much is that? It would reduce the budget deficit to about 2.5 percent of gross domestic product, which means it would be out of the danger zone where the debt is growing faster than the economy. And all without the Bowles-Simpson proposals to slash 200,000 federal workers, cut an already meager Medicaid budget, and other unfortunate compromises required merely to get Republicans to consider a deficit-reduction plan.
The only real cost is that taxes would revert to their Clinton-era levels. If you think the Clinton years were a bleak hellscape of oppressive tax rates dampening the entrepreneurial spirit, well, you probably aren’t advising Obama on economic policy.
If Obama can solve the mediumterm deficit problem unilaterally, why do the deficit scolds insist he must join with the Republicans in the spirit of solemn bipartisanship? The answer is that those who care the most about deficit reduction as an end also care even more about bipartisanship as a means. Deficit reduction used to be something Democrats and Republicans could occasionally agree upon, and deficit hawks love to relive those golden memories. But the last such deal took place in 1990, and conservatives revolted in protest against the slight upper-bracket tax hike that came along with very large spending cuts.
Since that time—excluding temporary measures like wars (Republican) or stimulus (Democratic)—every permanent policy change that increased the deficit has been led by Republicans (the Bush tax cuts, Bush’s Medicare drug benefit). Meanwhile, every law to reduce the deficit has been a partisan Democratic effort (Clinton’s 1993 budget, health care reform). Which is to say, the entire notion that deficit reduction is something you must or even can do on a bipartisan basis is no longer true. So why shouldn’t Obama just do it on his own terms?
Jonathan Chait is a senior editor for The New Republic. This article ran in the February 17, 2011, issue of the magazine.
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19 comments
I'd go for this but most middle income voters wouldn't . I think the economy will be doing pretty well by late 2012 - 13 but the unemployment rate will still be rather high by historical standards . There are so many tax goodies for the first 3 or 4 quintiles of the income scale between the Bush and Obama cuts that are in place that it will be very risky to take alot of them away post election. The Dems will get hammered. Republicans always seem to get off the hook on tax debates. One notable exception, " Read My Lips " . I agree with Chait that going back to 90's tax policy would be a great way to take the deficit down but I think that it's a political impossibility. Child tax credits , college tuition credits , expanded EITC and on and on. People will flip their lids.
- alanwilkov
February 3, 2011 at 12:45am
I can see the headlines in 2013 now: "Bears mauled by strong growth as Dollar fears ease on stronger deficit figures." I think that's how it will play out. Obama will let all the tax cuts expire, the Dollar empire is saved; commodity inflation subsides and world growth goes through the roof. By the time he leaves office he'll be hailed as better than FDR. Or he doesn't let them expire, for whatever reason, and he's hated as a DINO but I think that's unlikely.
- IggyPop
February 3, 2011 at 3:47am
Once Obama is reelected he will be quite free to let the tax cuts expire even if the Democrats get hammered in 2014 and I don't think that they will. A healthy economy will make a small tax increase unimportant as a polical issue.
- paskunac
February 3, 2011 at 6:12am
I favor extension of the tax cuts. And if the economy hasn’t recovered sufficiently to significantly reduce unemployment, I favor an increase in the tax cuts. The payroll tax cuts. Let the Bush tax cuts expire to show that Obama is serious about the deficit. And extend and, if needed, increase the payroll tax cuts for both the economic boost and the political boost. Most people pay far more in payroll taxes than income taxes, but they don’t make distinctions between types of taxes, focusing instead on the withholding from their pay. A payroll tax cut is immediate and obvious, reducing the withholding and increasing take-home pay, which is how most people measure their economic well-being. Of course, this is the same argument I made all of last year. So what if Obama (and Chait) are a couple of years late.
- rayward
February 3, 2011 at 7:29am
Fantastic piece, with characteristically toothsome helpings of sarcasm!
- bmoodie
February 3, 2011 at 8:46am
Brilliant! Seriously. We never COULD afford the Bush tax-cuts, they were predicated on Supply-Side Economic arguments that have NEVER worked out, and all that was BEFORE he started two wars. Yes, let the Bush tax-cuts fully expire. "If you think the Clinton years were a bleak hellscape of oppressive tax rates dampening the entrepreneurial spirit..." -- good point, instead the Clinton years were a time of amazing productivity for the economy. All that "oppressive tax rates" foobar (it was 40% on top earners, not the 90% we saw under Eisenhower, and 28% for Capital Gains) is yet more Republican Orwellian misdirection. As is "soak the rich!" It's time we let these "voodoo economics" expire.
- AllanL5
February 3, 2011 at 9:14am
Obama will never repeal the Bush tax cut. The reason is simple. He is a millionaire and would lose money if he declare the end of Bush tax cut. The poor will continue paying for Obama/Bush follies and lose their life in Afghanistan.
- Poupic
February 3, 2011 at 9:26am
Just so. I only hope you are right, Chait.
- roidubouloi
February 3, 2011 at 9:50am
Well done as always, Jonathan "...If you think the Clinton years were a bleak hellscape of oppressive tax rates dampening the entrepreneurial spirit, well, you probably aren’t advising Obama on economic policy." To which I would add, "nor should you be advising anyone on economics, even in casual conversation, ever"
- Tristan
February 3, 2011 at 9:52am
Love the argument and my husband and I would be all for letting all tax cuts expire. Why - because we value America, we value our children, we want an America that can be strong and once again a leader. Letting the tax cuts expire would go a long way for seeing those results. The tax cuts needs to be explained in a way everyone can understand a la Ross Perot. Yes there will be those that say mine, mine, mine, but really they will be in the minority and can be ignored.
- sirrah619
February 3, 2011 at 10:38am
Ah let the man smoke for chrissakes. Outstanding piece JC! This is why (as the adolescents I work with would say) rock so intensely.
- WandreyCer
February 3, 2011 at 11:12am
ooops JC - make that YOU rock so intensely.
- WandreyCer
February 3, 2011 at 11:13am
I like to say that the lowered capital gains and dividend 15% rates have contributed to low job numbers inasmuch as it discouranges investment in small businesses where ownership profits would be taxed at 35%. So letting that cut expire is a good thing for the economy.
- Nusholtz
February 3, 2011 at 3:56pm
Problem with payroll tax cuts a la rayward is that they beggar Social Security, which doesn't need under-funding as the Boomers start retiring. Better strategy is a combo high income tax increase and a VAT on luxury purchases, especially luxury real estate such as second homes and vacation properties. Stuff the Wall Street bankers buy; if we can't outlaw their bad behavior, let us tax them according to their capacity to spend flagrantly.
- Caedmus
February 3, 2011 at 4:26pm
Obama SHOULD use his veto pen to do exactly what you say, but your argument that he WILL do so is a little thin. My take on the factors motivating Obama isn't quite as simplistic as poupic's, but I see ample evidence that the president is infatuated with high financiers' way of seeing things in a way that those of us who supported him in 2008 didn't anticipate. (Though as far back as early 2007 I recall a TNR poster called tepulkhin [sp?] cautioning us to beware of Obama's affinity for and support from hedge-fund billionaires.) Also, I have seen little evidence that the president has the stones to stand up and defend/spin a potentially unpopular policy move such as vetoing a tax-cut extension on middle-income earners. Obama does not wield power as effectively as he might. He's one of these managers--and I've known many of them in my time--who want everyone to like them. They hold a lot of meetings with quality catering and solicit opinions from everyone, and they work like demons towards building consensus. And when things are going well for the organization and everyone is in basic agreement about the path to take, this consensus-building approach works better than any other. Everyone feels valued and that they've contributed to the group's success and it's all just so GREAT. Problems arise, however, as soon as you throw a couple of assholes into the mix. They won't play ball. And if you're an everybody-love-me type manager, you'll ill-equipped to deal with them. The only way to deal with assholes in your organization is with force. They need to be shut down, shut out and marginalized. And they are NEVER going to like you. The thing is, with an organization the size of the USG there are always assholes--lots of them. In fact, we're burdened with an entire party of assholes known as the GOP.
- AaronW
February 3, 2011 at 4:38pm
Which of these myths is the most pernicious: (1) those with the highest incomes pay the highest marginal federal tax rate, (2) payroll taxes are dedicated solely to funding social security benefits, (3) rap is music, or (4) good girls (guys) go to heaven.
- rayward
February 3, 2011 at 7:14pm
If Obama can maneuver the blame to the GOP, then he could have political cover to do this. However, there is something Chait is leaving out. Letting the Bush tax cuts expire does not bring us back to the Clinton years. There are additional taxes that are part of ACA coming soon (e.g. on investment income being taxed to bolster Medicare) that will be hitting people who, while definitely doing better than most, still have huge budgets to meet that will definitely feel a pinch. I'm not saying we need to cry for these people. It's just that they vote, so we get back to the political thing. Maybe once they lapse, -- assuming Obama is re-elected -- there are other tweaks to the system that he could throw to the taxpayers who are well off but not super well off. One of the myths of tax simplification is that there should be very few tax brackets. Tax brackets are not complicated. What they are is genuinely progressive. The same logic that tells us that the poor should pay a lower rate than the middle class should also recognize that the well off should not pay at the same rate as the truly wealthy. I'm not saying what the top rate should be, but it certainly needn't return to the rates that prevailed during the Eisenhower years. The same goes for the Estate Tax. The top rate hits as soon as an estate hits goes past the exemption. As someone who prepares estate returns, I can tell you there is a big difference between someone who has built a small fortune during their lifetime and someone who inherited a few hundred million. The former are the ones that have much of their wealth in their small businesses that have to pay attorneys to come up with insurance deals to make sure the estate tax can be paid when the older generation dies and wants to pass the business on to their children. Sorry so long. I hope I didn't veer too far off the subject.
- PaulChum63
February 3, 2011 at 9:37pm
Too bad the administration missed their first chance to go with this strategy but the whitehouse political geniuses already extended W’s irresponsible tax cuts. They should have let the tax cuts expire on 1/1/11 and used “Obama” tax cuts as a wedge issue on Republicans. - dmcmahon
- NR138704
February 4, 2011 at 4:22pm
I'm coming to this thread weeks too late. But since it won't be the last time that Jonathan hymns the virtues of letting Bush's tax cuts expire, this will serve as a rehearsal for a more timely post down the road. There's a problem. The Republicans have proven very adept at framing the terms of the debate. And they will rebrand letting tax cuts expire as "raising taxes". And will do so with a perfectly straight face, since letting Bush era tax cuts expire does mean that taxes will increase, compared to where they are now. Hence the devil in the Bush strategy. So if Obama is planning on letting the cuts expire after 2012, how will he campaign for reelection. Because his Republican opponents, and the deafening conservative echo chamber will bludgeon him with the challenge "My President, are you going to raise our taxes" It willl serve to no avail for him to reply, "No, I'm not going to raise taxes, I'm going to let tax cuts expire" for that will seem like evasion. He's stuck. He either looks them right in the eye and lies, which I doubt he is capable of doing. Or he fesses up, and quite likely loses the election.
- robertgorton
February 16, 2011 at 8:51pm