The core problem, from the Republicans’ point of view, is that they stupidly enacted temporary tax cuts during the George W. Bush administration. Their expiration creates a bludgeon that could eventually beat sense into them on the tax issue.
In December 2010, Republicans congratulated themselves that their strategy was working when they refused to negotiate with President Obama because he demanded that tax cuts for the rich be allowed to expire. Faced with an earlier “fiscal cliff” on Jan. 1, 2011, he caved to Republican intransigence and agreed to a two-year extension of all the Bush tax cuts. That extension expires at the end of this year, and President Obama has renewed his demand that taxes on the rich be allowed to rise.
Republicans like the House speaker, John Boehner of Ohio, are talking bravely about holding the line on taxes, and Mr. Boehner has dismissed the demand for higher tax rates for the rich.
In 2010, the economy was too fragile to take risks, even temporarily. President Obama had no choice but to cave. Today, the president’s hand is greatly strengthened, the economy is much stronger, and he is running out of time to get America’s fiscal house in order on his watch. Republicans are chastened by their defeat, and he will never hold a stronger hand against them than he does now. Therefore, taking the risks with the tax cuts, at least temporarily, is now a viable option.
If things go bad because of Republican inflexibility, the political dynamics change completely in January. At that point, Republicans have to accept whatever tax cut Obama is willing to support to replace the Bush tax cuts in whole or part. His veto pen would be enough to force Republicans to negotiate in good faith for a change, even if Democrats didn’t control the Senate.
Any 2013 tax cut that would offset the effect of allowing the Bush tax cuts to expire can easily be made retroactive. The Internal Revenue Service can delay changing withholding tables for average wage earners if it chooses, on the assumption that their tax cuts will be preserved under any possible compromise, thus forestalling any impact from the fiscal cliff on the vast majority of Americans.
And here’s the kicker. All President Obama has to do is insist that whatever retroactive tax cuts are enacted next year be temporary. Not only will this mitigate the impact of higher taxes for the same reason that temporary tax cuts are limited in their impact, but he will have another opportunity in a year or two to bludgeon Republicans back to the negotiating table, where their adamant opposition to higher taxes will again be negated by an automatic tax increase absent Congressional action.
Revenues are just 15.8 percent of gross domestic product, compared with a postwar average of 18.5 percent, which even Mr. Norquist accepts as a long-term goal. The sooner we get there, the sooner we can get the national finances on track toward sustainability.
Because Republicans now lack the power to prevent legislated tax increases, the nation is no longer held hostage to their stubborn opposition to any tax increase whatsoever, which has torpedoed every serious effort to reduce the trajectory of debt since 2010.
That is why I am optimistic about our fiscal future.
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author ofThe Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take. This post is excerpted from The New York Times Economix blog with the permission of the author.