I am encouraged to see signs that prominent Democrats are openly contemplating letting all of Bush’s tax cuts expire rather than cutting a deal with the Republicans during the lame duck session between November’s election and the new Congress that will be seated in early January.
When we discuss the Bush tax cuts, we tend to focus only on the cuts for the rich because those have the most impact on the deficit and are the least sensible and most unnecessary. Focusing on the rich also enables us to have some small prayer of raising revenue in our current political environment. Yet, the Democrats cannot even unite on raising taxes on those making $250,000 a year.
It will be far easier to let all the Bush tax cuts lapse. This can be done easily. All Obama has to do is refuse to sign any deal or any short-term extension during the lame-duck. On the first of January 2013, the government would instantly get a $3.7 trillion boost on their books. This would free Congress up to redo the tax code in an more equitable way. In the worst case scenario, Romney would be in charge of this and would enjoy majorities in both houses. He might be able to use the budget reconciliation process to enact another Bush-like temporary (decade-long) tax cut, but it’s unlikely that that would would work with the budget deficits we’re facing. Bush had surpluses and still needed Dick Cheney to break the tie in the Senate for both his 2001 and 2003 tax cuts.
However, if, as now seems likely, Obama wins reelection, he will be in a great position to influence the new tax code. If Congress does nothing, everyone who pays taxes will see their taxes go up. Having won a second term, the president will have at least some initial political clout. And we’ve seen recently that the GOP will fold when put in a bad position, like letting student loan rates double or letting the payroll tax holiday run out.
It will be easier to make a final decision after we see the election results. If Romney wins, Obama may explore a deal, but it would have to be a very good one to make it worth his while to extend any part of the Bush tax cuts. If he wins, he’ll want to see how he did in the Senate and the House. Why deal with Boehner’s House in a lame-duck when he can deal with Pelosi’s House in the new year? However, the opposite could be true of Reid’s Senate in the lame-duck versus McConnell’s Senate in the new year.
Obama will also have to consider the risk of economic damage if Congress can’t reach some kind of short-term deal. A large, sudden tax hike on everyone is not what is called-for by our economic times. If it isn’t fixed quickly in the new year, it could send the economy back to recession and sour the beginning of his second-term.
Still, unless we want to travel on a constant Grover Norquist-fueled downward trajectory on federal revenues, Obama needs to take this opportunity to let all rates lapse. No one in Congress will have to do a thing. And that’s probably the only way anything smart can get done in Washington DC these days.
