When the president is away, White House aides do not get to play—especially after President Obama took a “shellacking” by the American people. And so as President Obama tours Asia—repeating parts of a post-drubbing tour that Bill Clinton embarked on in 1994–they have been plotting various scenarios for the great showdown that approaches next week: the expiration of George W. Bush’s tax cuts.
The only thing certain is that no one is sure just what will happen. Republicans in both the House and the Senate, along with most of the business lobby, have staked out a clear position: Extend all of the tax cuts.
President Obama, by contrast, has long maintained that he wanted to permanently extend all of the tax cuts, with the exception of those cuts for couples who make more than $250,000, which he feels should rise to pre-2001 levels, a move that would reduce the deficit by about $700 million over ten years. “Why would we borrow money on policies that won’t help the economy and help people who don’t need help?” he asked rhetorically in a September press conference.
After the midterm elections, however, he all but admitted that this was not a tenable position in the current political climate. Not only are Republicans apparently united against him, but several members of the Senate Democratic caucus, including Virginia’s Jim Webb and Connecticut’s Joe Lieberman, have waivered. Add to that a new Republican senator from Illinois, who will be seated this year, and a new West Virginia Democrat, Joe Manchin, who cannot be counted on to vote with the president, and it is clear that President Obama had to shift strategy.
“With respect to the tax cut issue, my goal is to make sure that we don’t have a huge spike in taxes for middle-class families,” the president said in a press conference last week. “So my goal is to sit down with Speaker-elect Boehner and Mitch McConnell and Harry and Nancy sometime in the next few weeks and see where we can move forward in a way that, first of all, does no harm.”
So where will the two sides meet? There are essentially three options: A temporary extension of the tax brackets for all taxpayers, a re-jiggering of the tax bracket structure to create a new very high income level, or doing nothing and letting the cuts expire. The last option would punish lower income taxpayers, whom neither party wants to hurt, comically demonstrating the total ineptness of Washington and probably hurting the public image of both Democrats and Republicans. The idea for a new tax bracket, which has been floated most recently by the Urban Institute, is unlikely to gain much traction in the short term, since it would weaken future Republican negotiations on taxation by putting greater distance between the very wealthy and everyone else.
So the most likely outcome is an extension. But for how long? If they extend it just a few months, both parties could restart the showdown next year, with a new Congress. If they extend it all a full year, the showdown could happen in regular Congressional order, with committee hearings and the like, and possibly be part of a bigger rethinking of the tax code. If they extend it all two years, then it becomes a presidential election year issue. If they extend it all three years, then it all gets punted to the next president.
What can be expected is a whole lot of political theater whatever the outcome. This is an issue that neatly divides the bases of the Democratic and Republican parties. It will also serve as an early test of negotiating heft. Both Democrats and Republicans are now competing for the mantle of the party of reasonable, effective, sober governance. And the outcome of this early battle is likely to set the stage for the bigger fights to come next year.