Editorial Board

For Economy’s Sake, Cut Another Temporary Deal on Taxes: View

President Barack Obama’s budget proposal would let the Bush tax cuts for high-income households expire at the end of this year. Republicans in Congress are certain to resist.

Meanwhile, the same Republicans agreed Monday to keep a $94 billion payroll tax cut through year-end without paying for it. But at the same time, they’re holding back on extending unemployment benefits and a much-needed patch to the Medicare program unless Democrats find about $55 billion in spending offsets.

Seems like a mini-rerun of the same, tired debate over economic stimulus versus deficit reduction, doesn’t it? Don’t be fooled -- it’s much worse. It is a prelude to a dangerous standoff that will almost certainly arrive in December and could make last year’s debt-reduction negotiations seem like, well, tiddlywinks.

Consider this scenario: All the Bush tax cuts, $4 trillion worth when spread over 10 years, expire on Dec. 31. The next day, $1.2 trillion in automatic spending reductions that Congress and the White House agreed to when they couldn’t cut a budget deal start to kick in. On top of that, the U.S. government once again will bump up against its debt ceiling. And that’s if we’re lucky.

Minuscule Cushion

If you read nothing else in the president’s 2013 budget documents, turn to page 70 in the Analytical Perspectives. Table 6-2 shows total debt on Sept. 30, the end of this fiscal year, will be $16.334 trillion. The statutory limit is $16.394 trillion. That leaves a minuscule $60 billion cushion that may or may not get the U.S. through the Nov. 6 elections.

In all likelihood, this triple-witching hour will be left to a lame-duck Congress and possibly an outgoing president. Either way, continuing uncertainty and, if the brinkmanship goes too far, a much-too-abrupt fiscal tightening are in the offing.

Our suggestion for preventing this impasse: Democrats should agree to leave in place all the Bush tax cuts through 2013. In return, Republicans should extend the payroll tax cut, unemployment benefits and existing Medicare payments to physicians (which otherwise would be cut 27 percent) through 2012.

That’s far from ideal, but let’s make a sad but necessary distinction between the correct way to address this problem and what is feasible in a fractured system of government in a presidential election year.

The benchmark for sound tax policy is not in doubt: The U.S. needs comprehensive tax reform to simplify the tax code, broaden the tax base and improve fairness. Over the next 10 years, more revenue needs to be raised than today’s code would provide. A broader tax base can achieve this.

Unfortunately, tax reform isn’t going to happen this side of the election. Meanwhile, immediate fiscal repairs are necessary. The economy is showing tentative signs of improvement, but it is far too soon to start pushing taxes higher. The labor market is still too weak to bear the brunt of a fully restored payroll tax. And a recent Congressional Budget Office analysis said the expiration of all the Bush tax cuts would crush the economy next year, pulling the growth rate back down to barely 1 percent.

It isn’t good enough to say either the lame-duck Congress or a new Congress and administration taking office in 2013 would find a way to avoid fiscal chaos. Uncertainty over this already is a needless drag on the economy, and it needs to be dispelled.

Something to Gain

Tactically speaking, both sides have something to gain from the deal we’re suggesting. Here’s the logic from the Republican side: The party hurt itself by dragging its feet over extending the payroll tax cut. Republicans are not at their most appealing when they call for higher taxes on low- and middle-income households. Also, another extension of all the Bush tax cuts would be quite a prize. This should be enough, in their political calculations, to offset a defeat over extended unemployment benefits.

More Democrats than Republicans might feel they were the losers from what we’re suggesting. Many saw the previous extension of the Bush tax cuts as an embarrassing defeat. The automatic reversal of those cuts under current law, in their view, is the best weapon they have in the fight for political advantage.

We disagree. If Congress failed to extend the Bush tax cuts through 2013, it is the Democrats who would then have to say, “We’d rather raise everybody’s taxes than postpone raising taxes on the rich.” The administration was right to see this as a losing position a year ago.

What happens next year depends on the outcome of the election, of course. But if the deal we’re suggesting were done, the economy would be stronger at the end of 2013 and the threat (if Democrats are in a position to make it) to let all the Bush tax cuts expire unless those for the rich were reversed would look more credible and less self-harming politically.

There’s something for both sides, and for the economy, in stopping the next tax and debt-ceiling fight before it starts. As soon as possible -- right now, ideally, but after the election if we’re being realistic -- Congress should take up the larger challenge of comprehensive tax reform.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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