It’s with some pride that I note the current strategy from Senate Democrats to let the Bush tax cuts expire and then, if necessary, come back with a more progressive tax cut later. I was calling for this in 2010, and pretty much nobody agreed, save for perhaps Tom Udall (D-NM). Two years later, it has congealed into conventional wisdom, exactly as I described it, and exactly as Sheldon Whitehouse described it to me at Netroots Nation.
Senate Democrats — holding firm against extending tax cuts for the rich — are proposing a novel way to circumvent the Republican pledge not to vote for any tax increase: Allow all the tax cuts to expire Jan. 1, then vote on a tax cut for the middle class shortly thereafter [...]
Virtually every Republican in Congress has taken the pledge, pushed by Grover Norquist’s Americans for Tax Reform, never to vote for a tax increase — a pledge both parties see as a serious impediment to a tax compromise. But if tax rates snap back to the levels of the Clinton presidency on Jan. 1, any legislation to reinstate some of those tax cuts — but not all of them — would be considered a tax cut.
“Many Republicans are starting to realize something important: On Jan. 1, if we haven’t gotten to a deal, Grover Norquist and his pledge are no longer relevant to this conversation,” Senator Patty Murray, Democrat of Washington, said this week in a speech at the Brookings Institution. “We will have a new fiscal and political reality.”
If your goal is to have a more progressive tax code – forget about raising revenue for a moment, one feature of this is the consequences for income inequality, though the top marginal rates would have to get more punitive to have a real impact – then this is the only way to get it done. The new proposal would be scored as a large tax cut, and Republicans would deal with that the way they dealt with the payroll tax cut early this year, by mumbling and grumbling and eventually agreeing to it. That’s the theory, anyway.
Incidentally, that payroll tax cut, or an equivalent like Making Work Pay that doesn’t touch Social Security revenue, will be gone at the end of the year. As was also said to me at Netroots Nation, this time by Ben Cardin, nobody has proposed extending that. So despite the fiscal contraction that would result, and despite our precarious economic state even with that tax cut (which is focused largely on middle-class families, though not perfectly), everyone appears willing to let that expire. The resultant increase in withholding on people’s paychecks will add MORE pressure to agree to a middle-class tax cut in 2013, not less. But the economy will take a hit either way, and everyone earning a wage will see their taxes go up next year.
The only question is whether the rich will see a big increase or not. And that’s predicated on the strategy of letting the Bush tax cuts expire completely. Predictably, because it’s the only workable idea, nobody believes Democrats will stand firm. I’ll just say that they should.
So far things look promising. But Senate Democrats are not going as far as the White House in the tax plan they’ll vote on next week, which in addition to letting the tax cuts expire above $250,000 in income, increases dividend taxes to 20% for that income class. The Obama budget would have treated dividends as ordinary income, increasing the tax rate as high as 39.6% for the richest Americans. So even with this hardball maneuver, Democrats in the Senate are tipping their hand that they will be more generous to the wealthy in the aftermath.