You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

Tax Haven

How to save the economy and humiliate the GOP without really trying.

The deficit is a huge dilemma that’s too big for one party to solve, say the pundits and various deficit scolds. (Alan Simpson and Erskine Bowles: “Neither party can fix this problem on its own, and both parties have a responsibility to do their part.) Nonsense, I say. There’s a really easy, and 100 percent partisan, answer: Just let all the Bush tax cuts expire. President Obama can accomplish this without negotiations, compromise of any sort, or even putting aside petty agendas for the national good. The solution is hiding in plain sight.

The reason it’s hiding, of course, is that Obama has repeatedly promised, first as a presidential candidate and then as president, to keep in place the Bush tax cuts on income under $250,000 a year. Since Republicans also endorse those tax cuts, everybody assumes they’ll continue indefinitely. Everybody may be wrong.

First of all, President Obama—any young children or innocent adults still clutching their inaugural ticket should probably stop reading right now—does not really want to continue any of the Bush tax cuts. How do I know this? Because nobody who shares Obama’s beliefs about domestic or economic policy wants to continue the Bush tax cuts. I hate to spoil anybody’s pleasant delusions, but Obama agreed to extend the Bush tax cuts on income under $250,000 because he wanted to get elected president. Also he probably still sneaks the occasional cigarette. Sorry.

So Obama is stuck with a promise he doesn’t want to keep. Fortunately for him, the Republicans don’t want to keep it, either. How do I know that? Because conservatives who don’t have to run for elected office admit it. Alan Viard of the conservative American Enterprise Institute (and formerly of the Bush administration) recently wrote that extending just the tax cuts for income under $250,000 a year “would increase the deficit while reducing incentives for earning income, saving, and investing.” Tax cuts for the middle class—while perhaps necessary to make tax cuts for the rich politically palatable—are merely the price of admission. Viard, recalling that George W. Bush used middle-class tax cuts to sell tax cuts for the rich, notes, “From a short-run political perspective, the focus on increasing disposable income [i.e., middle-class tax cuts] worked, helping secure the passage of the tax cut, including its marginal rate reductions [i.e., upper-bracket tax cuts].”

Republicans who have to face voters tend to phrase it a bit more obliquely. John Thune, the senator, potential presidential candidate, and apostle of GOP establishmentarianism, asserts that the best way to spur economic growth is “to allow the people who create the jobs in this country, the people who make more than $250,000, to continue to do well.” Republicans express frequent concern about the fact that large numbers of taxpayers have little or no income tax burden and that the richest 1 percent is paying a higher share of the tax burden. The Republicans’ view was revealed in their negotiations last fall over the expiration of the Bush tax cuts. They didn’t treat Obama’s offer to extend only the tax cuts on income under $250,000 as half a loaf. They treated it as totally unacceptable.

Republicans gave Obama the choice of extending all the tax cuts or extending none of them. Since the economy remains extremely fragile, and Obama didn’t want to risk the recovery in the approach to his reelection (sorry for the cynicism, kids), he agreed to extend all the tax cuts through 2012. He also got an extension of unemployment benefits plus a cut in the payroll tax, which benefits middle-class workers, as part of the deal.

But what happens at the end of 2012? Well, the economy should be two years further along into a recovery. And Obama’s reelection will be behind him. At that point, his choice is easy. All he has to do is refuse to extend the tax cuts on income over $250,000 a year. He can say he favors a tax cut for income under that level, but he won’t have to follow through on that pledge, because Republicans will never agree to pass a tax cut only on income under $250,000. In a hostage standoff where one party secretly hates the hostage and the other party is at best indifferent to the hostage, then the hostage is probably going to die. End result: All the Bush tax cuts disappear starting in 2013.

Obama could blame Republicans for letting taxes go up on the hard-working middle class. (Hey—he wanted to extend them!) But their expiration would be a huge policy boon. It would slice $3.9 trillion off the national debt by 2020. How much is that? It would reduce the budget deficit to about 2.5 percent of gross domestic product, which means it would be out of the danger zone where the debt is growing faster than the economy. And all without the Bowles-Simpson proposals to slash 200,000 federal workers, cut an already meager Medicaid budget, and other unfortunate compromises required merely to get Republicans to consider a deficit-reduction plan.

The only real cost is that taxes would revert to their Clinton-era levels. If you think the Clinton years were a bleak hellscape of oppressive tax rates dampening the entrepreneurial spirit, well, you probably aren’t advising Obama on economic policy.

If Obama can solve the mediumterm deficit problem unilaterally, why do the deficit scolds insist he must join with the Republicans in the spirit of solemn bipartisanship? The answer is that those who care the most about deficit reduction as an end also care even more about bipartisanship as a means. Deficit reduction used to be something Democrats and Republicans could occasionally agree upon, and deficit hawks love to relive those golden memories. But the last such deal took place in 1990, and conservatives revolted in protest against the slight upper-bracket tax hike that came along with very large spending cuts.

Since that time—excluding temporary measures like wars (Republican) or stimulus (Democratic)—every permanent policy change that increased the deficit has been led by Republicans (the Bush tax cuts, Bush’s Medicare drug benefit). Meanwhile, every law to reduce the deficit has been a partisan Democratic effort (Clinton’s 1993 budget, health care reform). Which is to say, the entire notion that deficit reduction is something you must or even can do on a bipartisan basis is no longer true. So why shouldn’t Obama just do it on his own terms?

Jonathan Chait is a senior editor for The New Republic. This article ran in the February 17, 2011, issue of the magazine.

For more TNR, become a fan on Facebook and follow us on Twitter.