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White House Coming Around to Notion of Letting the Bush Tax Cuts Expire

Noam Scheiber, author of the most recent book on the Obama Administration’s economic policies and in a position to know the thinking over there, postulates that the President may up and allow the Bush tax cuts to expire at the end of 2012. He’d never say it out loud, of course, certainly not in the context of a Presidential campaign, where conservatives would demonize it as “the largest tax cut in history” or something. But the matter won’t get decided until after the elections, and either way, at that point, Obama will never face voters again.

Scheiber writes that Obama is more interested in this possibility than his advisers:

In the fall of 2009, Obama’s chief congressional lobbyist, Phil Schiliro, touted a clever idea for dealing with the tax cuts: introduce a bill that would extend the middle-class cuts for two years while allowing the upper-income portions to expire. After two years, the middle-class cuts would also expire unless Congress paid for them with off-setting savings or tax increases.

Schiliro figured that, if the bill passed, the whole mess of tax cuts was likely to disappear when all was said and done, since there aren’t exactly trillions of dollars in easy-to-cut spending just lying around the federal budget, while raising other taxes was unlikely. And even if the bill didn’t pass, it would put Republicans on the defensive by shining a light on the huge budget costs of their most cherished accomplishment.

At first, Schiliro’s plan went nowhere—in truth it was as much a stunt as a serious proposal. But Schiliro had an important ally: Peter Orszag, the president’s budget director. Orszag was the administration’s most outspoken deficit hawk. He believed the only practical way to balance the budget was to repeal all the Bush tax cuts, not just the upper-income variety.

I don’t see why this is considered a stunt. The policy move with the best chance of working would be to let everything expire and then, after the fact, come back with the “Obama tax cuts” for the middle class and the working poor, if so desired. Otherwise, you’ll never get separation on this fundamental intertwining of the tax cuts under $250,000 and over $250,000. Republicans simply won’t allow it. We saw over the last year that tax cuts framed as benefiting mostly the middle class become hard for Republicans to resist. So why not let the badly designed Bush tax cuts expire, and re-run that movie with the new, exciting “Obama tax cuts?”

You’re going to hear the same people humping the deficit for the last three years claim that there’s no way to let the Bush tax cuts expire because you’ll take money out of the economy and harm the recovery. It’s true that tax increases during a recovery removes money from the economy. But you’re not going to be able to transform the tax code without removing the bias toward tax cuts designed by a Republican Congress and a Republican President, tilted heavily toward the rich. It’s the main bargaining chip left. And the Clinton years seemed to zing along with a higher tax rate than today without much trouble. I don’t suggest that increasing taxes in this fashion will be without pitfalls. But the two-step of letting the Bush tax cuts expire and then dangling other tax cuts sounds like something that would interest the Administration. It’s practically what they’ve already done on the payroll tax. And there are political if not economic benefits to ending the deficit caterwauling by reaching a medium-term balance, which would unquestionably be a side product of all this.

Furthermore, you could just build this into the negotiations so that you could frame it as a Republican intransigence that caused the expiration. Democrats have actually done a fair job of late painting Republicans as obstructionists, and the public is receptive to that argument.

Put it this way: if the President is a fiscal conservative – and every indication shows that’s the case – I would much rather that get manifested with tax increases than with cuts to Social Security or Medicare or the discretionary budget.

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David Dayen

David Dayen