Wednesday, August 10, 2011

GOP will damn the polls and maintain tax intransigence

Andrew Sullivan, who wanted Obama to come out strong for Bowles-Simpson and make a crusade of deficit reduction in his State of the Union address, now suggests that Obama do the same with tax reform, a linchpin of any viable deficit reduction plan. (That is, a revamping of the tax code that shrinks loopholes, lowers rates, and nets substantial new revenue.) In support, Sullivan cites a compendium of polls from Bruce Bartlett:
They all show heavy majorities (most in the mid-60s) in favor of raising taxes on the wealthy as part of a deficit reduction plan. Yet this is the one issue on which Republicans seem determined to take a stand. If the Democrats cannot marshall 2 - 1 support for their policies into actual legislation, they really need to pack it in as a viable party (although one could argue they packed it in years ago).
This would be true if we lived in a sane political environment, especially since Republicans will not be able to prevent the Bush tax cuts from expiring if Obama and the Democrats are willing to let them all expire.  Reversion to Clinton-era rates would raise an estimated $3.6 trillion over current rates in ten years -- as opposed to the $1-2 trillion Democrats would be able to extract through tax reform, would Republicans agree to any increase at all.

We do not, however, inhabit in a sane political political environment.  Consider:

1) Regardless of what Americans tell pollsters about taxes, in 2010 they elected 87 GOP House freshmen, all of whom took Grover Norquist's insane no-new-taxes pledge, which means not only that they pledged never to raise taxes, but also to offset the closing of any tax loophole or subsidy with a tax cut of equal value.  An absolute majority of the House -- 235 GOP members -- has signed that pledge.

2) Republicans have watched their poll numbers plummet in the wake of the debt ceiling negotiations -- a drop that correlates with Americans' attitudes toward deficit reduction cited in Bartlett's polls. In response, the Party has doubled down -- refudiating its Gang of Six members who defied Grover Norquist and signed onto a plan that would raise $1.6 trillion in new revenue over ten years, and promising to appoint only no-new-revenue absolutists to the supercommittee.

3) Obama does not want to revert to Clinton-era rates for anyone but the wealthiest 2% of the population.  He promised not to in 2008, he extended all the cuts rather than risk letting them all expire in 2010, and I doubt he'll be more willing in 2013.

4) Obama has always hedged his endorsement of the type of tax reform proposed in the Bowles-Simpson and Bipartisan Policy Center plans, which reduce "tax expenditures" while lowering rates. He always emphasizes that the loopholes he wants to close benefit only the rich. For example, on July 25, he cast the additional revenue he was seeking in a grand bargain with Boehner this way:
The first approach says, let’s live within our means by making serious, historic cuts in government spending.  Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President.  Let’s cut defense spending at the Pentagon by hundreds of billions of dollars.  Let’s cut out waste and fraud in health care programs like Medicare -- and at the same time, let’s make modest adjustments so that Medicare is still there for future generations.  Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.

Bowles-Simpson, in contrast, limits such broad-based deductions as mortgage interest, retirement savings and charitable giving; gets rid of others, such as college savings,;and reduces the income of Americans in every income quintile, albeit on a progressive basis.

Given the choice of raising taxes on everyone or no one in 2010, Obama chose to raise them on no one. I'd like to think that he cannot do the same if Republicans force the same choice in 2012 -- he has basically sworn not to.* Ultimately, I suspect he will get the GOP to agree to a measly $800 billion in new revenue over ten years, in a deal that either sunsets the Bush tax cuts for the top 2% only, or produces tax reform that yields equivalent revenue (less than half that proposed by Bowles-Simpson).  The GOP will justify yielding this far by claiming, quite rightly, that they had to do so to forestall expiration of all the Bush tax cuts. But I can't picture that deal happening this fall. Republicans will first test Democrats' willingness to squeeze the triggers in the deficit reduction bill just signed -- the automatic cuts that go into effect if the supercommittee can't agree on a comprehensive plan. They will next test Obama's willingness to let the Bush tax cuts expire.

In fact, if the GOP goes deep into 2012 thinking it has a good chance to win the presidential election -- and then, if in fact they do win -- they may let the Bush cuts expire rather than cut a deal that will raise far less revenue, trusting themselves to effect a massive tax cut in January 2013.

* In a press conference following his tax cut deal last December, Obama said, "I’m as opposed to the high-end tax cuts today as I’ve been for years. In the long run, we simply can’t afford them. And when they expire in two years, I will fight to end them."

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