Peter Orszag's Misguided Tax Trade

by Jonathan Chait | September 7, 2010

Recently departed budget director Peter Orszag says that Democrats should make a deal with Republicans to extend all the Bush tax cuts for two years in return for canceling them all out after two years:

Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

I don't understand the logic of this argument. The portion of the Bush tax cuts that only benefit people making more than $250,000 a year has some stimulative benefit -- anything that increases the short-term deficit has some stimulative benefit. But the bang for the buck is extremely low.

Republicans in Congress aren't that interested in buying an extra couple years of upper-income tax hikes -- and they certainly don't want to give Democrats political cover to wiggle out of their promise to preserve the Bush tax cuts for everybody earning less than $250,000. The Republican game is all about making the Bush tax cuts for the rich permanent. So Republicans are only going to agree to a deal like this if it increases the likelihood that, after the two-year extension, the tax cuts for the rich will simply be extended again.

And maybe it would. By 2013, there's a decent chance that Republicans will control the White House. Their top priority is obviously going to be an upper-income tax cut. But it will be politically easier for them if they're merely keeping the status quo in place.

It seems to me that Democrats need to take advantage of their shrinking window in which they control the legislative process and can control the terms of debate. They should bring up an extension of the middle class tax cuts. If Republicans block it, then Democrats can attack them for raising taxes on the middle class, while enjoying the benefits of the higher revenues brought about by that tax hike. They can keep bringing up middle class tax cuts and keep daring Republicans to block it on the grounds that the rich don't get a big enough share:

But basically I don't see the overlapping priorities that create the groundwork for a potential deal on taxes. Democrats want higher revenues and the most progressive possible tax code. Republicans want lower revenues and the least progressive possible tax code. The only way a deal could happen is if one side fools the other about what is being agreed to.

Source URL: http://www.newrepublic.com//blog/jonathan-chait/77494/peter-orszags-misguided-tax-trade