As part of my ongoing series, "I told you so!", I'll point out that the current impasse was completely foreseeable when President Obama and Congressional Republicans agreed to a "temporary" two-year extension of the expiring Bush tax cuts in 2010. The following is from "Will Dems fall for temporary tax cut gambit (again)?", which I published on December 8, 2010.
In the short term, there's a certain logic to giving in. Yes, passage of the middle class tax cuts and extended unemployment benefits won't happen without Republican support. Yes, the Democrats will be even less able to control the political agenda when the Republicans take control of the House in January . And, yes, letting all the tax cuts lapse would hurt the fragile economy.
But in the long term, the consequences of the "deal" could be devastating. Here's my nightmare scenario:
Think ahead two moves, to 2012, when this temporary deal expires. Many forecasters think the economy will still be fragile, so you can expect Republicans to argue that it is no time to raise taxes.
And it's very possible if the economy remains weak and/or Obama doesn't find his mojo, that there will be a Republican president and a Republican senate.
At that point, Republicans might well not agree to another temporary extension of the tax rates. Instead, they'll wait until they control government to introduce HR1 in the 2013 Congress -- a permanent extension of the Bush tax cuts that the new president will sign triumphantly.That is exactly where we are today. The president has proposed a one-year extension of the middle class tax cuts, which he defines as incomes under $250,000. The Democrats in Congress apparently would like to ratchet up middle class to include everyone earning under $1 million. The Republicans are insisting that all the Bush tax cuts be extended permanently. And, by the way, we are several trillion dollars closer to insolvency than we were in 2010 and the economic recovery seems hardly more secure than it was then.
Since the economy is weak, the Republicans have a plausible argument against tax increases and a decent chance of regaining the White House so they won't compromise.
This plays nicely into the Democratic narrative that Republicans only care about rich people and the Republican narrative that Democrats want to raise taxes. It's a very tiring and unenlightening debate.
Obama's original sin was never seriously proposing a tax reform plan. Replacing the Bush Tax Cuts with Bush Tax Cuts Lite is just bad policy. Over the long term, we simply can't afford even the middle class part of the Bush tax cuts, and the tax code is unfair, inefficient, and incomprehensible. It badly needs an overhaul.
The president has talked a lot about tax reform--he asked Paul Volcker to put together a plan (which was more of a set of guidelines than actual legislation) and his debt reduction commission proposed eliminating most tax breaks and cutting tax rates. Volcker's plan went into the same impregnable file drawer as President Bush's tax reform panel report. President Obama said that the Bowles-Simpson proposal had "made important progress" on tax reform, but apparently not enough to prompt an actual presidential proposal.
The president has also proposed corporate tax reform, which isn't a bad idea, and the "Buffett Rule," which is, but nothing resembling comprehensive individual income tax reform, or even a coherent alternative to the Bush tax plan.
So we'll dance to the edge of the fiscal cliff and, more likely than not, we'll temporarily extend all the Bush tax cuts after the election. Even if Mr. Romney wins, I wouldn't be surprised if the extension is only temporary. Getting to play the Democrats for suckers every year or two must be a lot of fun--and a great source of campaign contributions--for the GOP.
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