The strategy should be very simple. If nothing happens in Congress, the Bush tax cuts will expire on the rich and the poor alike. Some kind of bill has to pass in order for us to avoid a tax hike on everyone who pays income taxes. Even if, as Peter Orszag tried to express, we cannot afford these tax cuts in the long-term, there is no good reason to let them sunset on the poor and middle class at a time when anemic consumer demand is keeping unemployment unacceptably high. While tax cuts are an inefficient means of stimulating the economy, tax hikes on those with limited disposable income are downright counterproductive. Therefore, the administration should do the following.
Craft a bill that maintains the current marginal rates except for the highest bracket, which will return to thirty-nine percent for fiscal year 2012. This is in keeping with the president’s campaign promise, but does allow the rich to enjoy one more year at reduced rates. Millionaires will be getting a $100,000 break next year.
The bill would offer to maintain Bush-level taxes for everyone next year, and for 97% of Americans in the years after. The alternative, doing nothing, would raise everyone’s taxes and immediately cost millionaires a hundred grand. Then we can see who really wants to see the bill fail.
The bill would involve an expensive concession, so it can’t fairly be said to be “rammed down anyone’s throat.” And, even rich people make discretionary purchases of things like planes, yachts, and second or third homes. So, there would be some weak stimulative effect in those industries and markets.
Another advantage of this approach is that it would eliminate the Bush tax cuts for the wealthy in a way that it would be near impossible to revoke. Even a Republican House and Senate couldn’t overcome filibusters and vetoes to restore the old rate.
But the main advantage is that this approach involves a bit of compromise without going back on an important campaign pledge, and while addressing legitimate concerns that weak demand argues against tax hikes on anyone at this time. It’s not optimal policy, but optimal policy isn’t on the table.
It’s good politics, too. It allows the Democrats to blame the Republicans for raising everyone’s taxes because they care only about rich people’s taxes. It highlight’s their obstructive tactics and clarifies the kind of gridlock we can expect if Republicans make gains in the midterms.
