What Is The Secret Budget Deal?

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JONATHAN CHAIT JULY 21, 2011

What Is The Secret Budget Deal?

Numerous hazy, ill-defined descriptions of a possible deficit deal have been floating around this afternoon. All parties have denied that they've struck an agreement. It's possible they have a tentative deal they've agreed to float to their caucuses, and it's also possible that somebody is leaking something short of a full deal in order to gin up a backlash.

That said, something clearly is happening, and it seems to involve President Obama giving ground on taxes. Here's the Washington Post's description:

According to congressional sources, Obama has apparently offered to forgo any tax increases in the initial deal, postponing an overhaul of the tax code until next year.

That was also the shape of the old deal, but with one significant exception: Obama had been pressing Republicans to extend the Bush-era tax cuts for middle-class households now, allowing the cuts that benefit the wealthiest households to expire next year. If that part of the bargain were taken off the table, the aides said, Democrats would be left with no guarantee that Republicans would actually follow through with tax reform in the future.

Here's Brian Beutler's:

In early negotiations that ultimately collapsed, Obama and Boehner considered passing a package of spending cuts with a promise to tackle tax reform in the coming months. But -- this is key -- a failsafe written in to the grand bargain would have decoupled most of the Bush tax cuts from those cuts benefiting only top earners. If comprehensive tax reform failed to pass this Congress, those top bracket cuts would expire.

Now, the aide says, Democrats are concerned that the White House might abandon that failsafe.

And Jay Newton-Small's:

In another major concession, no revenue increases would be included in the deal, and George W. Bush’s middle class tax cuts would not be decoupled from higher income cuts, as called for in the earlier “grand bargain” worked out by Obama and Boehner. Instead, all revenues would be handled in a second bill, a sweeping overhaul of the U.S. tax code, to be passed before the end of the year.

I can't say exactly what all this means. Newton-Small's account suggests we'll have no new revenue, and Obama and Boehner would support some kind of tax reform based on current tax levels by the end of the year. That would be a complete disaster, a total surrender by Obama.

On the other hand, it's also possible that something more subtle is going on. There's a basic asymmetry in the bargaining: all the Bush tax cuts expire at the end of 2012. And so, in the absence of agreement by Congress and Obama, the result will be a deficit-reducing package consisting entirely of higher taxes.

The negotiations thus far have involved varying levels of compromise between current tax rates and the tax rates we'd have if all the Bush tax cuts expire. Republicans have refused to accept even compromises that assume expiration of just a small portion of the Bush tax cuts. Perhaps the two sides are trying to construct a deal that locks in spending cuts while leaving the question of tax rates to be determined by the 2012 election. That's very different than locking in current tax rates.

In one sense, prying revenue out of Boehner may simply not be worth the price to Obama. Boehner either can't give ground on taxes, or the ground he gives is so meager it's not worth bargaining for if Obama can do as well or better just by winning re-election and refusing to extend tax cuts on income over $250,000. (And if Obama loses, the Republican president would probably just pass a big debt-financed tax cut.) So why not just agree to step one, and leave the debate over step two (cut entitlements or raise taxes on the rich) to the voters. That might meet Obama's desire to reposition himself for 2012 and Boehner's need to avoid agreeing to a tax hike. Obama can be the candidate who moved to the center, reduced the deficit and cut spending, and now wants wealthy Americans to share in the sacrifice. Boehner can be the guy who forced Obama to knuckle under and cut spending with no tax hikes.

Of course, that's pure speculation. It would make sense of the leaks without assuming a capitulation of historic magnitude by Obama. It's also entirely possible Obama just folded completely. We should find out the answer relatively soon.

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posted in: jonathan chait, brian beutler, jay newton-small, congress

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