Photographer: Evan Sung

Democrats Can Lose Debt Fight, Win on Bush Tax Cuts: Ezra Klein

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July 28 (Bloomberg) -- Democrats are going to lose this one. Whatever deal emerges to raise the debt ceiling, we can be pretty sure it won’t include revenue, it won’t include stimulus, and it will let Republicans pocket a trillion dollars or more in cuts without offering anything to Democrats in return.

It’s difficult to see how it could end otherwise. Virtually no Democrats are willing to go past Aug. 2 without raising the debt ceiling. Plenty of Republicans are prepared to blow through the deadline. That’s not a dynamic that lends itself to a deal. That’s a dynamic that lends itself to a ransom.

Yet Democrats will have their turn. On Dec. 31, 2012, three weeks before the end of President Barack Obama’s current term in office, the Bush tax cuts expire. Income tax rates will return to their Clinton-era levels. That amounts to a $3.6 trillion tax increase over 10 years, three or four times the $800 billion to $1.2 trillion in revenue increases that Obama and Speaker John Boehner were kicking around. And all Democrats need to do to secure that deal is -- nothing.

In fact, Democrats can just let the Republicans stop them from doing anything. Imagine that Obama and the Democrats simply adopt the recommendations of the Simpson-Bowles/Gang of Six deficit reduction plan -- tax reform that raises $2 trillion over 10 years and cuts rates for everyone. Republicans will almost certainly refuse any plan that raises any taxes on anyone. But if Republicans won’t budge, the Democrats can simply blame them for the gridlock that enables the Bush tax cuts to expire.

This scenario is the inverse of the current debt-ceiling debate, in which inaction will lead to an outcome -- a government default -- that Democrats can’t stomach and Republicans think they can. There is only one thing that could stand in the way of Democrats achieving their revenue goals on the last day of 2012: the Obama administration.

Republicans -- and even some Democrats -- think that the Obama administration lives to collect revenue. The truth is closer to the opposite. Senior administration aides view the expiration of the Bush tax cuts as less of an opportunity than a chore. About four-fifths of the cuts go to households making less than $250,000 a year, and they don’t want to raise taxes on those folks. They don’t like the politics of the issue, either. It’s an article of faith among Democratic strategists that debates on taxes inevitably favor Republicans, allowing Democrats to be hammered from the right and undermined from the left. Many Obama aides would prefer to avoid the debate, which they consider stale and intractable, altogether. They would rather focus on “win the future” issues like infrastructure, education and energy.

The White House’s strategy in the debt-ceiling negotiations has reflected its ambivalence, with Obama trying to extract either as much revenue as Republicans would allow or as little as Democrats would accept. Obama even offered Boehner a deal in which the Bush tax cuts would be extended right now, so Republicans wouldn’t have to fear a subsequent negotiation in which they lacked leverage. Ultimately, that deal fell through, which from a public policy standpoint, is probably for the best.

When Obama talks about taxes, a bit of incoherence creeps into the argument. “We can test the two theories,” Obama has said, comparing Bush tax policies with the Clinton policies that preceded them. “You had what happened during the ‘90s, right? Taxes for wealthy individuals were somewhat higher, businesses boomed, the economy boomed, great job growth. And then the 2000s, when taxes were cut on wealthy individuals, jobs didn’t grow as fast, businesses didn’t grow as fast.”

If the Bush tax cuts expire, we’ll go back to the tax rates of the ‘90s -- the period Obama posits was a golden age. If we extend the Bush tax cuts for every household making less than $250,000, then we’re adopting a tax policy very similar to what we had in the slow-growing Aughts. Yet that’s the Obama administration’s stated preference.

It’s true that 2013 is not an ideal time for a large tax increase. Nor is it an ideal time for huge spending cuts. So the question isn’t whether increasing taxes on the middle class is the perfect policy, but whether it’s better policy than reducing Social Security checks and infrastructure investment. And not just in 2013. What happens to the Bush tax cuts may define the limits of the possible in public policy for a long time to come.

The expiration of the tax cuts next year is the Democrats’ only opportunity to raise significant revenue. If they miss their big chance, what then? Republicans can’t pass Representative Paul Ryan’s budget, which slashes social spending, or anything much like it. But if Republicans can keep taxes from rising, deficits will continue to mount, and something like the Ryan budget will become inevitable. A world in which the two parties can’t agree on tax increases but can agree on spending cuts is one in which the government eventually shrinks dramatically. Republicans understand this. Do Democrats?

A year ago, I was less concerned about the Bush tax cuts. I assumed, as did many in Washington, that the Republicans’ antipathy to taxes was a negotiating stance. Eventually, we would strike a “grand bargain” that would reduce spending and raise revenue substantially. The past few months have proved me wrong.

Republicans have shown, at least to my satisfaction, that they will block any and all tax increases, no matter what incentives they are offered in return and no matter how dire the consequences of their refusal. Next year’s deadline on the Bush tax cuts offers Democrats their only chance to negotiate from a superior strategic position. Republicans will still be able to refuse to raise taxes. But if they do, it won’t matter.

(Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.)

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