Republicans control the House of Representatives, Democrats have a narrow hold on the Senate, and Barack Obama still lives in the White House. A showdown between the parties is bound to come soon, and will likely come when the lame-duck Congress — still controlled by Democrats — faces the December expiration of the Bush-era tax cuts. Democrats want to retain the lower tax rates for individuals earning less than $200,000 and households earning less than $250,000, while letting the tax breaks for those earning above that threshold expire. Republicans want to extend all the cuts, arguing that failing to do so is the same as raising taxes, bad medicine for an economy recovering from a deep recession.
How this battle is resolved will set the tone for the next two years, as a split, but Republican-leaning Congress approaches the inevitable collision with a Democratic president seeking re-election.
Both parties frame their positions within carefully constructed political contexts.
Republicans say the slowly growing economy is hampered by “uncertainty” about the future of the Bush tax breaks. Republicans are correct in asserting that business does not thrive with policies at a crossroads. Businesses, especially large ones, have policies they favor. But when those policies fail to materialize, they are able to plan when the playing field is clearly defined for the foreseeable future.
If the tax rates for the wealthiest individuals and the most highly profitable large businesses are returned to their Clinton-era levels, the uncertainty factor will evaporate, Democrats can argue. And by retaining the lower tax rates for middle income households and small businesses, the party can position itself as champion of the middle class.
Former Labor Secretary Robert Reich notes that a net 22 million jobs were created during Clinton administration (and 1.1 million during the George W. Bush years). Returning tax rates to Clinton-era levels for those earning over $250,000, about 2 percent of tax filers, “won’t inhibit their spending,” he writes, “because they already save a large portion of what they earn, and already spend what they want to spend.”
If the GOP wants to reduce the deficit, it must consider allowing the relatively soft impact of letting taxes rise on the rich. David Stockman, budget director under President Ronald Reagan, said on an ABC News program he had no faith in the GOP House cutting the deficit. “Both parties, unfortunately, became free-lunch parties — the Republicans cutting taxes every time they had a chance, never doing anything about spending, and the Democrats digging in to defend everything that was there,” he said.
Mr. Stockman even made a moral argument in favor of letting the tax breaks for the rich expire. “Two years after the crisis on Wall Street, it has been announced that bonuses this year will be $144 billion, the highest in history. That’s who’s going to get this tax cut on the top, 2 percent of the population. They don’t need a tax cut. They don’t deserve it.”
On tax cuts, there is just one defensible position — help the middle class and let the wealthy pick up their share.