Up until now, the fight over what to do about the impending expiration of the Bush tax cuts has split along two fronts: The Obama administration wants to let the tax cuts for individuals and families making over $200,000 and $250,000 a year, respectively, return to their pre-Bush levels, while making the cuts for everyone else permanent. Meanwhile, the Republicans have argued for making the cuts permanent across the board.
The most important thing to get straight, right out of the box, is that both of these positions are fiscally insane. The Republicans’ preferred route would add at least $3 trillion to the national debt over the next decade, while Obama’s preferred option would “only” add $2.3 trillion over the same time period. The tax cuts for the wealthy, which are all the two sides are fighting over, account for about $700 billion of the shortfall. Which isn’t chump change, but it makes only a small fraction of difference in the overall scope of the deficit problem. In other words, Obama and the Republicans haven’t been arguing over whether or not to torpedo the country’s fiscal health; they’ve just been arguing over what size of warhead to use.
Enter Peter Orszag, recently retired from his post as the White House’s director of the Office of Management and Budget, who had his first op-ed in The New York Times this past Monday. His piece offered a third option: Extend all the tax cuts for another two years, and then let the whole package die. His logic was that ending the middle and lower class tax cuts now would hurt the country’s economic recovery, but we can’t afford to let any of the tax cuts continue for too much longer. And since the Republicans’ have shown themselves bullheadedly determined to protect the comfort and privilege of the richest Americans, Orszag concluded that a compromise position of temporarily extending all the cuts was the most politically feasible possibility.
Now, the structure of his argument, with its central priority of ending all the tax cuts as quickly as politically and economically possible, should have been obvious to anyone. But because the mainstream media is shallow and loves drama, Orszag’s concession on extending the tax cuts for the wealthy was cast as a move towards the conservative position and a “rift” with the White House. Which is silly, since he only suggested it as part of a political strategy for doing away with the cuts all together. As David Dayen pointed out, but literally no one else seems to have noticed, the real difference between Orszag and Obama is what to do about the middle/lower class cuts. In his Wednesday speech on the economy, Obama doubled down once again on his commitment to ending the tax cuts for the wealthy now, and making the middle/lower class cuts permanent.
However, the deeper and more consequential question is, could Orszag’s suggestion actually work? The preliminary arguments convince me the answer is “no,” for the simple reason that extending the tax cuts for two years simply kicks the can down the road. Come 2013, we’ll find ourselves right back again in this same debate, with the political system facing the same temptation to just extend the tax cuts again. The fact is that neither the White House nor either party in Congress want to be seen advocating tax hikes on the middle class, and if I understand the timing, the cuts would expiring just after the 2012 elections. I don’t see how the transformation of the tax cuts into a major election season issue could be avoided, in which case I can’t imagine Obama or the Democrats committing to ensuring that taxes on middle class voters go up. It would be political harakiri.
Jonathan Chait argued on Tuesday that the driving goal of the Republicans is to lock in tax cuts for the wealthy, so they would only agree to Orszag’s deal if they actually thought it would be a good way to eventually finagle permanent cuts. Which was prescient, since, lo and behold, Republican House leader John Boehner said this morning he’d be open to Orszag’s deal. And today in National Review, J.D. Foster praised Orszag’s suggestion as “a good start,” with the caveat that a permanent extension would be even better. Which should make it obvious that conservatives see a two year extension as a trojan horse for eventually cementing the cuts into the budget in perpetuity.
Orszag’s heart is in the right place, and on the policy substance his proposal is infinitely preferable to either of the options being bandied about by Obama or the Republicans. But it seems very likely he’s misjudged the politics. My hunch is that the optimal balance between wise policy and political feasibility is letting all the tax cuts die now — which isn’t an impossibility, since political gridlock could result in nothing being done, and doing nothing would allow the cuts to expire as the original legislation requires. But even though letting the cuts expire in 2013 would probably be even harder than letting them expire now, the latter may still be more than our political system can stomach. The problem is that voters want a free lunch, and no one — not the President, not the Democrats, and certainly not the Republicans — has the stones to tell them they can’t have it. That dynamic won’t change between now and 2013. So, barring some sort of minor miracle or upheaval, we seem to be eagerly preparing to blow a multi-trillion dollar hole in our national budget. And thus come one very large step closer to fiscal calamity.