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Letting the Tax Cuts Expire as a Deficit Cut Roadblock

With the sad spectacle of the Catfood Commission report, it’s been mildly comforting to see progressives coming out with their own competing plans. I think that anytime you engage on these grounds you’ve already lost to an extent, but if the media won’t stop with this nonsense, at least someone has to get on the field and put up a tent-pole on the other side. And given what we have going on in the White House, it’s clear that some budget cuts are coming, and it’s a matter of aligning them in the least harsh way.

So that’s the context of the Citizen’s Commission report put out by the Campaign for America’s Future today. It calls for the novel idea of actually growing the economy to deal with the deficit, since it’s the only thing that’s ever worked on a large scale. And it calls to target what actually drives deficits; namely, runaway health care and military spending, and unaffordable tax cuts for the rich. You can balance the budget while investing in the country and growing the economy, that’s essentially the message, and it’s a good one.

Nevertheless, I was struck by their recommendation on taxes:

Tax justice and empowered workers generate prosperity, fairness, growth—and revenues.Tax cuts were a major cause of our current deficit. Any plan that continues or increases tax breaks for the wealthy will add to the deficit. In an era of excessive inequality, we should end Bush era tax cuts for the wealthiest Americans, tax capital gains and dividends as normal income, tax activities damaging to our economy like excessive financial speculation, and eliminate or reduce tax expenditures that mainly benefit the wealthy.

To ensure ongoing prosperity, we must also provide ongoing tax relief for lower- and middle-income households. These households will spend, not save, the additional income. We must also take steps to reduce the war on unions and worker rights (involving corporate action and misguided public policy) that has been a major factor in preventing working from getting their share of productivity growth over the past three decades. Lower taxes and higher wages for working families will generate consumer activity that leads to more growth, more jobs, and more tax revenue.

I don’t totally disagree with any of this, in a perfect world. But I’ve been coming around to the idea that the tax cuts from 2001-2010 did nothing for jobs and should just be set aside now. We all know that the 2001-2010 era featured the worst job and economic growth in postwar history. Why are we so desirous of returning to that period? Why do we want to lock in rates for the first $250,000 of income which inevitably put us in the predicament we’re in now, where we’re probably going to extend all the tax cuts just to get that relief in the middle? The Clinton-era revenue seemed totally sufficient for a boom in the economy before.

I put the question to the authors of the Citizens Commission report on a conference call today: Robert Borosage, the co-director of the Campaign for America’s Future?; Deepak Bhargava, executive director of the Center for Community Change; Angela Glover Blackwell of PolicyLink?; Larry Cohen of the Communications Workers of America; and Bob Kuttner of CAF and The American Prospect. Their response was that they do raise revenue in the plan, they just do it with progressive taxation. And they don’t front-load the taxes either; unlike the deficit commission, they delay any increases for several years, to give time for recovery. “This is partly about who pays and who suffers, but also about sequencing,” said I think Bhargava (not totally sure).

I agree with all of that, but I think it ignores a little of the reality here. Budget cuts are coming. If you listen to the President and watch his activities, that much is clear. The easiest vote you can make right now to add four trillion dollars to the federal Treasury over the next 10 years is to allow the Bush tax cuts to expire. It may stunt recovery in some ways; but it also would obviate the need to reduce safety net or other obligations down the road. If these tax increases crowd out savage cuts to other areas of the budget, it has to be seriously considered.

The Democrats are unlikely to play this card, because they simply believe that Republicans will win any tax fight. But doing nothing is pretty easy for Congress, and that’s all that needs to be done. You can devolve the rest into a spin war, with lots of finger-pointing, and I don’t think anyone will vote on the issue in two years if the economy is in OK shape. I sympathize with the sequencing issue, but basically there’s a major fight building on domestic spending, and the path of least resistance leads to letting the tax cuts expire. Would you rather be responsible for cutting the VA? Education? All of these other priorities?

I’ve turned around on this issue. I think heavy doses of gridlock will ultimately be the best of some unpalatable options.

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David Dayen

David Dayen