The Tax-Cut Hand Grenade

Posted on Sep 7, 2010

By Ruth Marcus

Well, I know what question I’d ask President Obama at Friday’s news conference.

“Mr. President, your former budget director, Peter Orszag, has said that the Bush tax cuts should be extended for two years and then allowed to expire—even for those making under $250,000 a year. You have said those ‘middle class’ cuts should be made permanent. He says that is ‘simply not affordable.’ Why is he wrong?”

There is no good answer to this question—something I think the president well understands, even if he is unwilling to publicly acknowledge it. Amazingly, in the midst of supposedly heightened concern about deficit spending, the current debate about the tax cuts involves whether to extend most of them (at a cost of about $2.3 trillion over the next decade) or all of them (adding another $700 billion to the tab).

This is not dumb and dumber—it’s irresponsible and irresponsibler.

Based on my conversations with administration officials, Orszag’s recent column in The New York Times was the opposite of a trial balloon floated by a White House proxy. It was a hand grenade lobbed into the middle of a roiling debate among Democrats about how to handle the expiring tax cuts.

The most immediately explosive piece was Orszag’s grudging acceptance that the upper-income tax cuts be temporarily extended. He’d prefer that they lapse, as the administration wants, but would be willing to let them continue as the price of letting all the cuts expire in 2013.

I’d be delighted to pay that price—if I were as convinced as Orszag is that it would reap the desired result. “The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote,” Orszag wrote. “It happens by default, so congressional deadlock works in its favor.”

Betting on congressional deadlock tends to be a pretty safe wager. But would Congress, especially a more Republican Congress, let the tax cuts expire? In an election year? Will a president up for re-election veto a middle-class tax cut?

The danger of keeping the upper-income and middle-class tax cuts on the same timetable is that both could end up being extended. The current debate offers an opportunity to decouple them—one that the administration and congressional Democrats should not squander, notwithstanding Orszag’s advice.

At the same time, Orszag is entirely correct that the tax cuts would remain unaffordable even if the upper-income part were allowed to expire. He doesn’t say it quite so bluntly, but I will: The president’s position that the tax cuts for those making less than $250,000 a year should be extended permanently is fiscally reckless. 

Orszag ticked through the relentless arithmetic: Getting the deficit under control (that is, down to 3 percent of gross domestic product) will require savings of between $200 billion and $400 billion annually, or between 1 percent and 2 percent of GDP. Those savings aren’t going to come, in the medium term, from entitlement spending: Medicare and Medicaid have already been squeezed by health reform, and any changes to Social Security would be phased in gradually.

This leaves the discretionary-spending half of the budget, part of which—interest on the debt—is not discretionary unless you think defaulting on the debt is an option. Projected defense spending already includes savings from winding down operations in Iraq and Afghanistan; cutting 5 percent from the Pentagon’s base budget would be no easy feat—and would save a scant 0.2 percent of GDP. Match that with similar—and similarly painful to achieve—savings from discretionary spending, and you’ve got less than half a percent of GDP.

Repeat after me: There is no path to a close-to-balanced budget without new revenue.

This was abundantly clear during the campaign, even as candidate Obama pledged that “no family making less than $250,000 a year will see any form of tax increases. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

But instead of using the economic crisis and the resulting increase in the deficit as an excuse to back off, Obama, in office, doubled down. “If your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not a single dime,” he vowed a month after taking office.

A nice promise—but “simply not affordable,” according to the president’s own former budget director. Mr. President, your answer?

Ruth Marcus’ e-mail address is marcusr(at symbol)washpost.com.

© 2010, Washington Post Writers Group

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