[Note: this is the second post of the weekend. Don't miss the first, below.
The major newspapers today announce that a new legislative battle will take place this fall--quite possibly on the eve of the Congressional elections. The issue is the tax cuts put in place by George W. Bush in 2001, 2002, and 2003, all of which, if I am not mistaken, will end this year, restoring the rates that prevailed during the Clinton Administration, when they produced the first sustained surplus since the time before the Depression. As usual, we can look at this issue from a number of revealing angles.
In retrospect the cuts were both disastrous and clearly irresponsible. The surplus in the budget was a terrible threat to Republican plans to cripple the federal government--an invitation to government to do more. The cuts and the recession eliminated it and turned the surplus into a large deficit, one that ballooned again when the defense and intelligence budgets expanded tremendously after 9/11. But the decision to make the cuts temporary showed their irresponsibility. I am not sure why the Republicans took this step. It may have been because calculations showed these cuts would produce a permanent deficit, but it may also have been designed to create a new political issue eight or nine years down the road, when a Democrat might be back in power. If so, it succeeded.
The Administration, it seems to me, faces a rather interesting decision, and it seems that it is quite likely to blow it. For once, inaction would have the best outcome. It would raise income taxes on all Americans doing well enough to pay federal income taxes--at a time when the government desperately needs the money. The highest increases would of course fall on the highest brackets--including yours truly, some of whose income is taxed at the higher rate. But the Obama Administration wants to limit the reversion to individuals making $200,000 a year or families making $250,000. That would keep my own taxes where they are--and I think that would be a big mistake.
It's a dirty secret many of us would prefer to forget, but the recession isn't bad news for people with steady employment. Prices are down and labor is cheap. If one did not invest in an extravagant mortgage and holds a well-paying job, one's standard of living has not fallen. The country needs our help to reduce the deficit--and I'm willing to give mine. But in addition, the Administration's apparent plan to seek a new law this fall may well be politically or economically catastrophic.
The reason, of course, is that any new proposal will need 60 votes in the Senate, votes the Democrats will not have. The Republican Party is bound to insist that the Bush rates be retained for everyone--and several Democrats are already hinting that they may go along. That means the Republicans will surely filibuster any proposal to simply raise rates on the highest brackets and restore the estate tax (which already included a very generous exemption before it was temporarily eliminated by Bush.) That filibuster is very likely to be successful. Having kept many incumbent Democrats in Washington when they desperately need to be in their home districts campaigning, the Republicans will claim the credit for stopping another crippling Democratic tax increase designed to give hard-working Americans' money to the unworthy.
I would like to see the Administration simply let the laws lapse, but if they insist on trying to give middle-class earners (including some pretty well-to-ones) a break, they should simply let the cuts lapse this year and introduce new legislation to change middle-class rates next year. Then the Republicans will have to propose cutting the rates of higher earners as well, and the Republicans will have to filibuster explicitly against lower rates for the middle class. In fact, I would like to see the Administration go even further and combine a small rate cut for the middle class with an increase in the top rate to, let's say, 45% of income over $1 million a year. That is the kind of hike that could begin to make an impact on Wall Street compensation practices--and it would still be only half the top rate back in the 1950s.
For 18 months the Administration has been trying to split various differences with the Republicans. It hasn't worked, either for policy or politically. It is time for a real fight. The Administration should make it at a more favorable time, and do it on its own terms. And meanwhile, it can strike a blow for a truly responsible measure in the face of a deficit crisis.