Game of Chicken Over Bush Tax Cuts Is Near

Posted July 20, 2010 at 5:56pm

One of the great curiosities of this year’s politics is the relative absence of prominence of an earth-shaking event due at the end of the year: the expiration of all the Bush tax cuts.

[IMGCAP(1)]If indeed they expire, the result will hit everybody in a big way. It would mean a big jump in revenue over the coming decade, which Republicans such as Rep. Dave Camp (Mich.), ranking member on the Ways and Means Committee, are calling a huge tax increase foisted on American by Democrats. Camp calls it a $3.8 trillion tax hike, while Grover Norquist put the tab at a mere trillion.

Of course, we could put it the other way around: If Republicans get their way and the tax cuts are all made permanent, America will add another $3.8 trillion (or $1 trillion; a big number whatever standard you choose) to a ballooning federal debt. Either way, there will be a shock to an economy still reeling and teetering at the abyss of deflation and deeper downturn.

Given the stakes, it is surprising that this issue has taken a back seat to the discussion of health care reform, financial regulation, stimulus, unemployment benefits, energy, the oil spill and a slew of other topics — even more surprising since Congress allowed the estate tax to plummet this year, providing a substantial windfall to the heirs of George Steinbrenner and other wealthy deceased individuals, before the tax reverts on Jan. 1 to draconian levels, threatening a lot of non-wealthy American families.

The coming end game is going to be fascinating if frightening, a bit like the game of chicken James Dean played in “Rebel Without a Cause” that did not end well for his adversary. We don’t know at this point if anyone goes over the cliff to a fiery conclusion below — except that the ill-fated car could well have all of us voters along for the ride.

What is especially fascinating is how the dynamic turns the usual give-and-take between the majority and minority parties on its head. Usually, it is the president and his majority pushing to implement their policy goals by passing legislation while the minority responds by using the weapons in its arsenal to obstruct, delay and perhaps kill those initiatives. The system the framers and successive political generations crafted gives a lot of potent weapons to the minority.

But the tax cuts are a different matter — here successful obstruction leads to the worst possible policy outcome for the minority Republicans, the erasure of their prized array of tax cuts. A lot of the leverage now is with the majority to bring the minority at least to the bargaining table. Not to say that Democrats are in a commanding position. They want to extend the tax cuts for those making less than $250,000 a year and achieve an estate tax remedy by restoring the more generous allowances effective in 2009. Neither of those goals can be achieved without legislative action, and that will require at least some GOP support, which does not look very promising at the moment.

It is worth repeating why we are in this particular car heading toward the cliff. When the Bush tax cuts were on the agenda at the very beginning of his presidency, Republicans in Congress and the White House made a tactical choice to avoid giving Senate Democrats the leverage that a 60-vote hurdle can provide by employing reconciliation (yes, the same tool that those who applied it then condemned roundly when it was used for health care reform this year). It was tricky to use reconciliation for tax cuts, which increased deficits when reconciliation was specifically supposed to be used for revenue-neutral or deficit-reducing programs. But the decision was made to use it for this purpose — but not to violate the proviso that the plan would increase deficits outside the budget window of 10 years.

That meant a ploy of declaring that all the tax cuts would expire entirely after 10 years, including the absurd-on-its-face provision that estate taxes would gradually decline to zero in 2010 — and then be fully restored in 2011. From the day after the tax cuts were signed into law, Republicans were campaigning to extend them, in effect admitting that the policy was built around a “never mind” ruse. To be fair, there were plenty of ruses in the health care reform reconciliation, so it is not as if one party is clean — this is legislative politics. But the charges now emanating from Republicans that the Democrats are going to be responsible for a huge tax hike is, shall we say, bemusing.

There could be a compromise, of course — one might include preserving the cuts for the $250,000 and under group, postponing the tax hike on the wealthy for a year to avoid the shock to a weak economy now, keeping capital gains taxes at their current low rates, and setting estate taxes somewhere between the Democrats’ proposal of a $3.5 million individual exemption and 45 percent top rate and the Republicans’ counter-proposal (joined by Arkansas Democratic Sen. Blanche Lincoln) of a $5 million individual exemption and 35 percent top rate.

But neither side seems inclined to compromise right now, or perhaps any time before the election. Democrats are happy to set a vote simply to cut non-fat-cat individual taxes and let Republicans filibuster or vote against it, while hitting them for being willing to increase deficits to give breaks to the super-rich. Republicans are happy to bash Democrats for presiding over Armageddon, the largest tax increase in history while Americans are hurting during a recession.

If there is no compromise before the election, the focus will shift to a lame-duck session, even as the clock ticks toward the full restoration of the cuts at midnight on Dec. 31. But what happens if Republicans win a majority in the House in November, meaning that they can at least shape the agenda and put forward bills to promote their vision, including one to make all the tax cuts permanent? With the partisan advantage then ready to shift on Jan. 3, will conservatives tolerate a weak-kneed compromise under lame-duck Democratic control in December? It is far more likely that Republicans will opt to wait until their numbers are vastly improved in January. Either way, an issue that has been a bit below the radar will soon surface, in a very big way.

Norman Ornstein is a resident scholar at the American Enterprise Institute.