Not sure why I’m talking about the Reid plan or the Boehner plan or any plan when nothing seems to have the votes, but a side benefit to Reid’s is that the Bush tax cuts are not folded into them. By contrast, the Boehner plan sets a specific deficit reduction target for the Catfood Commission II that arises from it, calling for $1.8 trillion. That would be from entitlements and taxes, and thus comes far short of restoring the Bush tax cuts in any way. In fact, what Boehner wanted from the grand bargain, and will probably seek in any extra-legislative commission, is a federal revenue cap.
The only leverage that Democrats hold, the only thing they have that Republicans want, is the coming expiration of the Bush tax cuts. That was true at the end of 2010, when they extended them for two years and got some more, mostly tax-side, stimulus as a result. It’s true at the end of 2012, when the hope is, if we avoid a default-caused depression, the economy will be on stronger footing. So there’s a belief that this leverage can be converted into a bold tax reform that would end loopholes and create a fairer tax code.
Except that the President has been trying to give away the Bush tax cuts throughout the negotiations. He’s not interested in using that leverage; he doesn’t want the fight. He would rather get the relatively meager revenue gains from canceling the tax cuts above $250,000 of income and be done. This is because of a stupid campaign promise that has put tax policy in a straightjacket.
As Matt Yglesias shows with the above chart, the benefits of the so-called “middle class” Bush tax cuts actually go disproportionately to the rich. We have marginal tax rates in this country, so the rich feel all the benefits on the cuts in the smaller tax brackets. These are not well-designed policies, and so just extending them rather than letting them expire and writing a new set of better-distributed policies misses a big opportunity. Anyway, a policy that allows low taxes for people making not enough to live but practically no services for them doesn’t really help them out.
The truth is that, if we had the same distributional impact in tax policy at the individual and corporate level that we did in the 1960s, we wouldn’t have a budget deficit. But Democrats are afraid to say that. They’re afraid to get into any argument about taxes for fear that they cannot win. And as a result, poorly-designed tax policies that benefit the rich – even when at a headline level they’re supposed to benefit the poor – predominate.