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How To Fight The Tax Cut Wars

The next big fight in Congress revolves around extending the Bush tax cuts. Unlike issues like climate change or stimulus, where the public does not accept the Democrats' basic analysis of the problem, on the tax cuts the Democrats hold the whip hand. The question is whether they emerge with a political win, a public policy win, or both.

Let's review a few basic facts about the Bush tax cuts. When Republicans took control of government in 2001, their top priority was reducing tax rates on high income earners. Since tax cuts for the rich were unpopular, they had to pair those cuts with middle-class tax cuts in order to make them politically salable. That's how they pressured Democrats into supporting them. By packaging the whole thing together, they could accuse Democrats of opposing tax cuts for the middle class if they voted no.

Now, ten years later -- and what a decade of bountiful economic growth we've enjoyed with the energies of investors and entrepreneurs finally unleashed from restrictive Clinton-era tax rates! -- the Bush tax cuts are scheduled to expire. Republicans want to extend the whole thing. Democrats just want to extend the parts that benefit people who earn less than $250,000 a year.

Now, here's the underlying dynamic. Raising taxes on the middle class is unpopular. But raising taxes on the rich is wildly popular. The truth is that neither party cares very much about the portion of the Bush tax cuts that benefit the middle class. Republicans just threw that in to sell the upper-bracket tax cuts, which is what they care about. Democrats might prefer a more progressive tax code with lower middle-class taxes, but most of them would rather have the revenue instead. But Democrats promised not to raise taxes on people earning less than $250,000 a year -- a promise they felt they had to make in order to win. And they can't break that promise without suffering political consequences.

Republicans, on the other hand, don't want to pass an extension of the middle-class Bush tax cuts without the upper-bracket tax cuts. That would leave the federal tax code more progressive than it was under Bill Clinton -- you'd have a combination of Clinton-era tax rates on the rich and Bush-era tax rates on the middle class. Conservatives have been fretting about such a result for more than a year, warning ominously about a country in which half the population pays no income tax. (They'd still pay other taxes, but the central Republican goal is to minimize the progressivity of the tax code.)

So we're down to a game of chicken. Here's why the Democrats hold the whip hand. They can pass an extension of the middle-class Bush tax cuts through the House. If Republicans let the bill pass, then they've lost their leverage to extend the unpopular Bush upper-income tax cuts. If they filibuster it, then Democrats can blame them for raising taxes on middle-class Americans. It would let Democrats out of their pledge. (Hey, they tried to keep the middle-class tax cuts.) Then nothing would pass, and we'd instantly revert to Clinton-era rates across the board.

What kind of effect would that have on the deficit? A huge one:

That dark orange stripe is the portion of the deficit attributable to the Bush tax cuts. That would be wiped out. Ending the tax cuts would basically solve the medium-term deficit problem.

The key factor here is that, just as Republicans got to frame the debate in 2001 by combining the tax cuts into an up or down vote, Democrats can frame the debate now by separating the policies Republicans pretend to care about from the ones they actually care about. Republicans want to have a vote on the whole collection of Bush-era tax cuts. Democrats shouldn't give it to them. You hold a separate vote on the middle class portion and dare them to oppose it.

This seems to be the plan:

"The Senate will move first, and it will be a test to see whether Republicans filibuster" to block the bill in a bid to also win tax cuts for higher earners, said Rep. Chris Van Hollen of Maryland, head of the House Democrats' re-election effort.
"If you can't get it out of the Senate, then you take it to the election," Mr. Van Hollen said in a recent interview. "You say to the American people that Republicans want to continue to hold middle-class tax relief hostage for an extension of tax breaks for [the well-to-do]. That will be the debate."

Republicans have followed a strategy of opposing nearly everything the Democrats do. It's worked very well. But the peculiar dynamic of this debate puts the Republicans in a position where they can't win, and obstructing the Democrats is probably their worst move.