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Once More, With Feeling* – James Kwak- Baseline Scenario

This is a syndicated repost courtesy of The Baseline Scenario. To view original, click here. Reposted with permission.

By James Kwak

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Peter Orszag wrote an article for the latest Democracy** about political dysfunction and the “looming fiscal showdown” at the end of this year. A lot of it is a warmed-over description of political polarization, although Orszag ignores one of its most important causes: the growing influence of money in politics and the resulting need for politicians to go chasing after contributions from extremist billionaires. (Orszag instead subscribes to the theory that political polarization results from public polarization, which has been pretty well debunked by Fiorina and Abrams.)

Orszag’s recommendation, however, is spot-on: First let the Bush tax cuts expire; then, assuming that economic stimulus is necessary, push for a big, across-the-board, temporary tax cut. (Orszag proposes a payroll tax cut and an increase in the standard deduction; I’ve previously proposed a payroll tax cut.)

There are two major reasons why President Obama should pursue this strategy. First, one more time: the Bush tax cuts were bad policy a decade ago and they are bad policy now. Even if you believe in a large permanent tax cut, giving the vast majority of it to high earners, the investor class, and heirs of multi-millionaires is the wrong way to do it. We need to get rid of them, once and for all.

Second, trying to negotiate a partial repeal of the Bush tax cuts (Obama’s current strategy) is bound to fail. Grover Norquist said it very clearly:

“If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.

“But that is different from supporting a plan by some Democrats that would end some or all of these lower tax rates, higher per-child tax credits and the A.M.T. patches.”

In other words, any bill that would extend some but not all of the Bush tax cuts would violate the Taxpayer Protection Pledge, get zero Republican votes, and fail. Why? Because. Despite the fact that no Republican has violated the pledge in any significant manner since, oh, 1990, the administration thinks it can get such a bill to pass.

Instead, if you let all the Bush tax cuts expire, the baseline gets reset (for Pledge purposes). In January 2013, taxes will be at 1997 levels (negotiated by Clinton and Gingrich), and anything the administration proposes will count as a tax cut—not just for the Pledge, but also for public opinion. Republicans being the party of tax cuts, it would be strange to see a major tax cut with 100% Democratic support and 0% Republican support.

Yes, the Republicans might block it out of spite and try to shift the blame to the Democrats (for letting the Bush tax cuts expire), and they will have the debt ceiling to give them leverage. But I find it hard to see how getting the Bush tax cuts out of the way would make things worse—either for President Obama or for the country.

* The greatest TV episode of all time, by the way.

** The issue also includes my review of Why Nations Fail and what it means for contemporary America.

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