Tax Cut Extensions and 2012

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With a deal to extend the Bush tax cuts for all income levels apparently imminent, there are a number of political implications for Obama’s re-election to consider. The most important is economic: The emerging deal is more-or-less stimulative. Leaving aside for a moment the option of only extending cuts on the first $250,000 in income, there’s a consensus that extending all the cuts is economically preferable to letting them all expire because doing the latter would simply leave people with less money to spend. Here’s Derek Thompson:

…without the extension, folks making $50,000 would see their after-tax income drop $1,000 next year. Who thinks that would increase buying, confidence, and economic growth in 2011?

Let’s also not forget that extending unemployment insurance, Obama’s chief demand at this point and a likely part of the end deal, is very efficient stimulus. It gets money to people who are incredibly likely to actually, you know, spend it. Of course getting the economy back on firmer footing is a national imperative, but it’s also crucial to Obama’s re-election prospects. And let’s face it: With long-term fiscal concerns, a Republican House and a filibustery Senate, Democrats have essentially no chance of pumping more money into the economy at once in the next two years. Ezra Klein:

The tax cuts for income over $250,000 will pump about $100 billion into the economy over the next two years….. Democrats look likely to get a 13-month extension of both unemployment insurance and many of the tax breaks built into the stimulus (Making Work Pay, the bump in the Earned Income Tax Credit and the Child Tax Credit, the business tax breaks and so on)….. this is a two-year stimulus package that approaches $300 billion.

There’s also the issue of when the cuts expire. Philip Klein lays out political scenarios if they were expire again in one, two or three years. He makes a number of good points, but his gist is this: One wouldn’t be too bad for Obama because it’d be minimal concession and an opportunity to re-fight the battle on possibly more favorable economic ground, two would be a disaster in the midst of the election and three would incense the left beyond repair.

A couple of points: With the recovery as stagnant as it is, it wouldn’t be wise to predict a significantly stronger economy in just one year. The weakness of the economy is the cause of Obama’s weak negotiating position to begin with (no credible threat of actually letting all the cuts expire), so one shouldn’t assume Democrats would be able to wage a drastically different battle next in 2011. As for two years from now, Klein may overstate public support for Republicans’ position on the top-tier cuts and the impact of liberal angst on Obama. Polling suggests the public isn’t in favor of extending cuts on $250,000 income and higher and an imminent election might make Obama more amenable to a soak-the-rich populist play. Counter-intuitively, a three-year extension might give Obama the strongest political hand. He wouldn’t have to worry about election-year politics playing into it and, most importantly, he could credibly threaten (or carry out) vetoing every bill that included an extension of the top-tier cuts. All that being said, every year the cuts are extended is incredibly expensive.

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