Posted by: Jeff | December 15, 2010

The Tax Cut Deal

Here’s a two-day-old post by Jonathan Chait that helps sum up why I’ve been incommunicado on the tax cut deal Obama struck with the Republicans: In short, it’s really hard to tell if it’s a good deal or not.

The administration thinks it bought time, to get past the economic crisis and its reelection, and it will have a much stronger position from which to veto any extension of the upper-bracket tax cuts. The Republicans think that they won this fight in 2010 and they can win it again. Essentially, Republicans antied up some unemployment benefits and progressive tax cuts in order to keep the Bush tax cuts for the rich alive for two more years, and win another chance to make them permanent.

From the [first] perspective… the liberal revolt against Obama is crazy. He prevented mass economic suffering by winning a second stimulus that Republicans would otherwise never have agreed to. On the other hand, they can’t be sure he really will hold the line in 2012.

Check out the link for the relevant pretty charts. Essentially, it boils down to whether or not you believe the taxes for the wealthy and the estate tax really will revert to their Clinton-era levels in two years’ time. (And do keep in mind that, while neither the Republicans nor the Democrats ever considered this a politically serious option, letting all the Bush tax cuts expire would be the best move, in terms of good budgetary policy.)

The problem is, gaming out whether the relevant players will hold the line at the end of 2012 involves all sorts of political and economic factors that are inherently difficult to predict. The critical thing appears to be getting Obama re-elected in 2012. At that point, he never has to worry about campaigning again, and will have a politically freer hand to do the unpopular thing and veto any further extension of the tax cuts. But will the boost in economic growth from this deal help or hurt Obama’s re-election chances? I find the former possibility more persuasive myself, but it’s still a gamble.

And what about the fact that the new expiration date is just two months after the 2012 election? There’s no way the question of a further extension won’t become a campaign issue. The White House seems to think this will play to their advantage, as the tax cuts for the wealthy are already broadly unpopular, and if the economy is doing better by then the Republicans’ excuse that we don’t want to hurt the recovery by allowing taxes on anyone to go up will have lost a lot of steam. However, the left appears to actually agree with the Republicans; the GOP won this hostage negotiation once, so why can’t they win it again? Who’s right? I haven’t the foggiest idea, but I don’t think one can ever underestimate the capacity of politicians to do stupid things over election-year optics.

Obama and the House Democrats could strengthen their hand by actually recommending an increase in the tax cuts extension — to three years — and thereby ensure the expiration occurs as far from any election as humanly possible. But no one seems to be thinking in that direction. Other worthwhile options for the House Democrats, highlighted by Chris Hayes and Ezra Klein, appear to be extending the payroll tax cut and the unemployment benefits extension to 2012 as well. (They’re currently set to expire in 2011, and as Hayes put it, if the tax cuts for the wealthy go for two years, why not the aid for everyone else?) That would stretch the economic boost over a longer period and give Obama more momentum going into re-election.

Finally, what happens if the deal dies? The Republicans have been warm to the deal so far, but grumbling from the right-wing base has been increasing. Palin, Limbaugh and the Tea Party crowd are all against it, claiming (I shit you not) that the estate tax shouldn’t be allowed to continue at all, and that the unemployment benefits — one of the smallest contributors to the deal’s overall cost — is an unacceptable addition to the deficit. Meanwhile, Charles Krauthammer seems to have walked right up to the edge of saying the Republicans should refuse the deal precisely because a better economy could help Obama in 2012. All of which means a lot of Senate Republicans could be looking for an excuse to back out of this thing, and that excuse may be provided if House Democrats win any changes to the deal. And were the deal to collapse, all the tax cuts would expire at the end of the year.

Then what? I suppose mutual gridlock and recrimination between the White House and the newly empowered Republicans could ensue, with the result being that the expiration sticks. Which I could certainly live with. But I think it’s more likely the legislature would panic and try to reinstate the cuts somehow once the new session is underway. Of course, by then the Republicans will have assumed their new majority in the House, and the chances of any deal as favorable to the Democrats’ priorities as the current one will have gone up in smoke.

Under those circumstances, I think what Obama should do is obvious: Declare, on no uncertain terms, he will veto any reinstatement that resurrects the tax cuts for the wealthy. Would he do it, or would he cave? Again, I have no idea. I don’t really buy the argument that Obama has been a weak negotiator so far. But if this last scenario comes about, that really will show us what the man is made of.

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