The politics of tax cuts is not as daunting as it may seem for the Obama administration. Tea party activists, along with conservative Republicans, are doubling down for the mid-term Congressional elections on the issues of federal spending and taxes. The most effective play for the Democrats here may well be a well-timed Obama administration reversal of policy to embrace the extension of all the Bush tax cuts. It makes good sense from both a political and policy perspective.
Politically, it could well take the steam out of the Republican/Tea Party narratives — that Obama is too liberal, a Socialist, wants an ever expanding role for the federal government, and is trying to “steal” our money through increasing taxes. A quick pivot on this issue now, along with continuing to pound Republicans for their recent opposition to small business incentives to create jobs, could be just the political recipe needed to stave off defeat for the Democrats in November.
In policy terms, there is actually not that much difference between the parties on extending the Bush tax cuts. Both Democratic and Republican tax plans extend Bush-era tax changes including reduced tax rates for families with incomes of $250,000 or less, extending tax credits for children and students, reductions in the marriage penalty and estate taxes, and changes in the alternative minimum tax (AMT) that have meant eliminating the AMT penalty for many middle income families. The actual difference between the parties relates only to the two highest tax brackets, limits on personal exemptions and itemized deductions, and treatment of long-term capital gains and dividends for families with incomes greater than $250,000.
Extending the Bush tax cuts will have the beneficial effects of adding more stimulus and reducing uncertainty about taxes, both of which could give a much needed boost to a struggling American economy. Both Democratic and Republican Party plans will also add to the deficit. Current estimates by the Office of Management and Budget are that the Democratic plan would cost $3.0 trillion in lost revenue over 10 years, while extending all the Bush tax cuts would result in $3.7 trillion in lost revenue over 10 years. The difference of $700 billion over ten years works out to be about $70 billion each year. And an argument can be made that the currently sputtering economy might well respond well psychologically to idea of extending all the cuts. Any resulting increase in growth in the short run could have the effect of reducing the ultimate total of lost revenues. Limiting the extension of the Bush tax cuts to only two or three years would also reduce the long term impact on the national debt. In both political and policy terms, then, embracing Bush-era tax cuts makes good political sense for President Obama and the Democrats.