Opportunity in a Tax Deal
Maybe I’m getting carried away because it is the season to believe in miracles, but the tax-cut deal just might turn out to be a blessing in disguise.
I’ve never seen congressional Democrats, especially those in the House, so angry at the White House, and I can understand why. It’s galling that the Bush tax cuts will be in place throughout President Obama’s term. The arguments against letting the tax cuts expire on income more than $250,000 — or even $1 million — were bogus. Only a fraction of small businesses would have been affected. The economic recovery wouldn’t have been threatened.
Even more galling was Republicans’ willingness to hold the extension of unemployment benefits hostage to a deal on extending the upper-bracket tax cuts. Republicans insisted that the cost of unemployment benefits be paid for — while blithely willing to pile up trillions more in debt by extending the tax cuts.
And on the subject of galling: How could this have happened with Democrats in control of the White House and both houses of Congress? Waiting until after the election, with its predictably disastrous results for Democrats, left the administration bargaining from a position of weakness.
Some blessing, right?
It could be. If Obama makes the most of the opportunity it presents, the deal offers him a relatively painless way to wriggle out of his most irresponsible campaign promise: to permanently extend the so-called middle-class tax cuts, the middle in this case amounting to 98 percent of households. Making those cuts permanent, as the president and congressional Democrats wanted, would cost more than $2 trillion over the next decade.
Now and for the next few years, in the midst of a faltering economic recovery, extending the middle-class tax cuts makes sense. Over the longer term, those cuts — premised on the notion that a predicted surplus would be big enough to pay off the debt and lower everyone’s taxes — are simply unaffordable.
In addition, the downside of the deal is not the marginal cost — about $70 billion — of extending the upper-income tax cuts for another few years along with the middle-class ones. In terms of stimulating the economy, which could badly use a boost, this is a stupid use of a relatively small amount of money, and the administration secured some real stimulus — refundable tax credits and the payroll tax credit — as part of the bargain.
The real risk of extending all the tax cuts temporarily is that it increases the chance of extending all of them permanently. Smart people who viewed the extension of middle-class tax cuts as an exorbitant fait accompli at least wanted to make certain to avoid incurring the additional cost — $700 billion — of including the upper-bracket cuts.
That was a reasonable worry, but I think the deficit commission report could change the risk assessment. It put Republicans, even extraordinarily conservative Republicans such as Oklahoma Sen. Tom Coburn, on record as being willing to raise tax revenue. And it illustrated the allure of a reformed tax code, with a broader base and fewer special-interest giveaways.
Hence, the potential blessing of extending the tax cuts for a few years. This is not the move I would have chosen, but it simultaneously creates space for a broader discussion of the tax system and forces action. The White House could seize the moment to shift the argument away from the stale question of whether rates should rise, and toward the more attractive playing field of how they can be lowered — and more revenue raised in the bargain.
It is easy to imagine the many ways in which such an effort could fall apart: over how much revenue to raise; over how much, and where, to cut spending alongside; over the thousands of imperiled tax breaks whose extinction would be fought by legions of interest groups.
It is fair to suspect that Republicans are more focused on defeating the president in 2012 than in crafting a bipartisan tax deal. It is fair to worry that tax history will repeat itself — that the White House will, in the heat of a re-election campaign, agree to another extension.
In politics as in religion, doubters do not lack for evidence to undergird their cynicism. But politicians might ask themselves: If you do not allow for the possibility of occasional legislative miracles, if your work is not aimed at achieving such transformational moments, then what’s the point, exactly, of being in this business?
Ruth Marcus’ e-mail address is marcusr(at symbol)washpost.com.
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