Why Democrats Are Losing The Tax Cut Debate

Democrats are losing the debate over the extension of the Bush tax cuts, but when you look at the playing field it seems pretty clear that that they never had a chance.

As I noted yesterday, the Democrats are clearly losing the debate over extension of the Bush tax cuts despite the fact that polls indicate that a majority of the public supports their position. In today’s New York Times, Nate Silver attempts to explain why:

There are essentially three possible outcomes in the debate: first, that the tax cuts are extended for everyone; second, that they are extended for no one; and third, that they are extended only below some threshold, most likely $250,000 for couples (although alternatives like $500,000 and $1 million have been proposed).

The way in which Republicans would rank these outcomes is clear. Their first preference would be to extend the tax cuts for everyone. But presumably, when push comes to shove, they’d prefer to extend some of the tax cuts — on incomes below $250,000 — instead of ending all of them.

It’s a little bit more difficult to identify the preferences of Democrats, because there are more divisions within the party: between the president and Congress, between moderate Democrats and liberal ones, between Democrats who are electorally vulnerable and those who aren’t. It is safe to say, however, that on balance, the Democrats would prefer to extend the tax cuts only below the $250,000 threshold, and not above it.

So, essentially, the Republicans have forced the Democrats into a game of political poker where it’s almost impossible to win. Thanks to yesterday’s votes in the Senate there are basically two options left, either the tax cuts are extended for everyone or they’re extended for no one. Republicans are betting that the Democrats don’t have the guts to actually let the tax cuts expire for everyone so they’re willing to call their bluff and force a vote for an across-the-board extension:

One consequence of the tax cuts lapsing for everyone, particularly if it extended the economic slump, is that voters could get very angry at incumbent politicians of all kinds, and would be inclined to vote many of them out of office, regardless of political party. Perhaps, after all the dust settled, Democrats would wind up in a stronger position than Republicans. (Although that seems unlikely; since the Democrats are the party that will have an incumbent president up for re-election — as well as two-thirds of the incumbent Senators — they still have more to lose, on balance, in 2012.) Even if this were true, however, it would not benefit incumbent politicians — and they are the ones who have a vote.

So suppose that Democrats don’t really want to end all of the tax cuts. Could they make a credible bluff to the contrary? The question answers itself. If Democrats aren’t willing to follow through on the bluff, then ultimately, it isn’t much of a bluff. And it will be called by an opponent skilled at the art of legislative poker, as Republicans are.

David Leonhardt continues the poker analogy, and argues that the rather obvious economic effect of allowing tax cuts to go up across the board make it impossible for the Democrats to credibly take a position that allows them to win the political fight:

If everyone’s taxes go up — and Congress enacts no new legislation to create jobs — it’s very likely to have a negative effect on the economy. Just the tax cuts for the rich are unlikely to have a big effect one way or the other. (As I’ve pointed out before, the economy lost jobs for two years after President Bush signed the 2001 tax cuts, and economic growth during his presidency was weak.) But an across-the-board tax increase on all households doesn’t seem like a very good prescription for an economy as troubled as the current one.

Who do you think is likely to receive more blame if the economy remains weak for another year or so – the top Democrat in Washington (Mr. Obama) or the top Republican (John Boehner)?

From my conversations with people on Capitol Hill and in the administration, I think both Republicans and Democrats — many of them, at least — have conducted a thought exercise very much like the one above. That’s why the Republicans are so confident now and the Democrats are in retreat.

To end where I started, the economic case for extending the high-end Bush tax cuts is not an impressive one. Democrats — including Mr. Obama, Harry Reid, Nancy Pelosi and their aides — had their chance to win on this issue. But that chance seems have to come and gone. Kenny Rogers had something to say on this issue.

In short, then, Democrats were dealt a bad hand. If we were having this debate about extending the Bush tax cuts in the middle of an economic boom rather than in the middle of a sluggish recovery that seems like it could come to an end any day, then it’s probable that the dynamics would be different. Arguing against cutting taxes is hard enough, it’s even harder when simple economics tells you that not implementing them doesn’t make economic sense. So, when it came to the debate over the Bush tax cuts, the Democrats never really had a a chance.

FILED UNDER: Congress, Taxes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Pete says:

    Why is this issue continually couched in the term, “tax cuts?’ Taxes have been raised and cut for decades. Taxes are at a level today that was set by Bush in 2001. They are tax levels; not tax cuts. The term “tax cut” is a clever way to perpetuate class warfare.

    This whole argument about tax “hikes” is more about the cowardice of politicians to soberly and realistically attack the tax code. It is easy to demagogue the rich; it is difficult and down right scary for politicians to reform their favorite piggy bank-the Federal Tax Code.

    BTW, Nate Silver says, “(As I’ve pointed out before, the economy lost jobs for two years after President Bush signed the 2001 tax cuts,…” This is kind of disingenuous. The full effect of the tax cuts didn’t kick in until 2003.

  2. Hari says:

    The Democrats have had their chance to win the tax extension debate for two years now. It’s not like this was any surprise. They should have announced early and often that the Bush tax cuts were going to expire on schedule, and then submitted the new Obama tax cuts to take place on Jan 1, 2011. The time is past now, but it’s not like the Democrats were forced into this bad position.

  3. john personna says:

    It is not simple economic sense, it is recognition that “blame politics” might matter more.

    The increment on income over $250K simply will not tip this economy. The GDP is $14.26 Trillion US dollars. We are talking about a $70B change. That is half a percent of the total.

    No, it seems the Dems are fearful that the economy will mire and Republicans will be able to assign “blame” to that single change. We’d have a great economy, they’ll say, if it wasn’t for the expiration of that one tax cut. That is a stupid argument, economically, but the Republicans have made stupider things stick.

    (Joe Scarborough has been saying on his show for a few days that the Administration fears a double-dip recession, even now, and that is why they’ll accept the full extension. I think that’s pretty shocking, because presumably they are dialed in with data from the Fed. If the Fed thinks double dip … we might be screwed regardless of this policy, and yes “blame politics” could come into play.)

  4. Pete says:

    JP, I’m with you about the double dip. Have the banks’ exposure to commercial real estate bubbled to the surface yet? The price of commodities suggests that something has to give re: interest rates.

  5. john personna says:

    Fairly sad stat here:

    http://www.ritholtz.com/blog/2010/12/deloitte-paints-a-troubling-view-of-consumer-lending/

    “22% of Americans with bank accounts experienced a serious negative credit situation during the last two years.”

  6. Patrick T. McGuire says:

    “Arguing against cutting taxes is hard enough, it’s even harder when simple economics tells you that not implementing them doesn’t make economic sense.”

    Rep. Paul Ryan said it best when he said “We don’t have a revenue problem, we have a spending problem.” Until Congress stops spending like teenage girls shopping with daddy’s credit card this problem won’t go away.

    All the arguing about non-existent “tax cuts” is just a lot of hot air.

  7. Stan says:

    Democrats aren’t losing the debate. The public clearly favors their position. They are going to lose the Senate vote because campaign contributors in the US have a disproportionate amount of influence. This wouldn’t happen if we were a democracy.

  8. Steve Plunk says:

    Pete and Patrick made the two important points. Read each of their posts twice.

  9. john personna says:

    All the arguing about non-existent “tax cuts” is just a lot of hot air.

    Mathematics FAIL.

  10. Eric Florack says:

    REally? Tell you what….Let’s try some math, Persona.

    Let’s imagine that by way of some grotesque fiat of the left we manage to take all of the income of those making over $250k. Every last penny.

    Assuming that the added income goes toward the debt and not to buying votes for Democrats with social(ist) programs, (WHICH HAS HAPPENED EVERY SINGLE TIME TAXES HAVE GOTTEN RAISED) what kind of dent would actually be made in the debt? Can you tell us?

  11. Eric Florack says:

    Pat; Exactly what I said yesterday.

  12. André Kenji says:

    “Rep. Paul Ryan said it best when he said “We don’t have a revenue problem, we have a spending problem.””

    The problem is that almost all of the spending problem comes from Defense, Social Security and Medicare. And the Paul Ryan´s is the party of spending in Defense, Social Security and Medicare;.

  13. john personna says:

    The quote was “non-existent ‘tax cuts'”

    That is a mathematics fail.

    (It would be also to suggest that completion of the temporary tax cuts are enough to balance the budget, but I didn’t make that suggestion, did I?)

  14. Tano says:

    “Republicans are betting that the Democrats don’t have the guts to actually let the tax cuts expire for everyone”

    This is kinda dumb Doug – you seem to be straining to find a way to sustain an insult to the Dems. It does not take “guts” to embrace a position that you do not wish to embrace. Where is the evidence that any significant number of Dems would find this position – letting them all expire – acceptable? No Dem that I know of has advocated this – in fact Obama made it a core promise of his campaign that he would not be raising taxes on the middle class.

    As Nate Sliver goes on to write:

    So suppose that Democrats don’t really want to end all of the tax cuts.

    Yeah, obviously. Who ever imagined they did? He is right – the Dems cannot bluff it, because everyone – possibly expecting you – knows that it is an unacceptable outcome for them.

    Don’t be a prisoner of your own analogies – or other people’s analogies. This is not like a game of poker. Everyone can see all the cards. It is just a raw political fight, with both sides having some ammo, but both sides lacking the power to overwhelm the other. So there will be a compromise worked out. The Dems have a lot they want to accomplish – unemployment insurance, DREAM act, DADT repeal, the START treaty. And the GOP wants tax cuts for income over 250K. That seems to be their number one priority, and so if the Dems end up getting ANY of their priorities, then tax cuts for all seems to be the obvious concession that the GOP will win.

    The interesting question is how much of the Dem wish list they get. If Obama wins all 4 of the priorities I listed, at only the cost of extending the rates for all, it will be a massive victory for him.

  15. Pete says:

    TANO, I reiterate: why is everybody using the term “tax cuts?” They were already cut and are now “tax rates.” Using that term “tax cuts” is simply part of the demagogy of class warfare. Wouldn’t you agree? It also muddies the argument.

  16. An Interested Party says:

    ‘Why is this issue continually couched in the term, ‘tax cuts?’ Taxes have been raised and cut for decades. Taxes are at a level today that was set by Bush in 2001. They are tax levels; not tax cuts. The term ‘tax cut’ is a clever way to perpetuate class warfare.’

    Oh, well according to that logic, allowing the top tax rate to go up a few percentage points isn’t a “tax hike” (wouldn’t want to perpetuate that nasty class warfare!) but, rather, it would be simply adjusting that tax level…

    “Until Congress stops spending like teenage girls shopping with daddy’s credit card this problem won’t go away.”

    And when you find even a bare majority of Congress that is willing to stop spending so much on Defense, Social Security, Medicare, and Medicaid (these areas being where most of that credit card goes), do let us know…in this sense, it is Ryan who is being disingenuous…as many people, and certainly many people in Congress, want all this spending, they just don’t want to pay for it…

    “Assuming that the added income goes toward the debt and not to buying votes for Democrats with social(ist) programs…”

    So this is what real conservatives believe? No wonder the real conservative who wrote that bitterly accuses most Republicans in power of not being “real conservatives” as it would be political suicide for them to push for ending or even making massive cuts to all those “Democrat social(ist) programs”…in this way, “real conservatives” are out in the political wilderness along with libertarians…no wonder neither group ever achieves real political power…

  17. Tano says:

    Patrick writes:

    Rep. Paul Ryan said it best when he said “We don’t have a revenue problem, we have a spending problem.”

    Amd Bithead responds:

    Pat; Exactly what I said yesterday.

    And as I pointed out, this is not an economic argument, but a political position, an ideological preference. Just looking at the economics of it, it also happens to be the position less supported by the facts.

    If you look at federal revenues during the better Bush years – 2003-2007, while we lived under these tax rates that Republicans are so fond of, the revenues went up, from 1782b – 2568b – an increase of 44%. If that could have been sustained over the next 4 years, taking us through 2011, the federal revenues for 2011 would have been in the neighborhood of 3700b. Expected federal outlays for 2011 are 3884b, so that would have resulted in a deficit of only 184b.

    But, because of the recession and financial crisis, revenues are dramatically down – for 2011, they are expected to be on the order of 2567b, which leads to a deficit of 1267b.

    Revenues for 2011 will be almost exactly the same as they were in 2007. Even accounting for nothing more than population growth and inflaton, you can see that that is not sustainable. There was also, of course, the small matter of stimulus which, even if you would have done it differently, would necessarily effect the budget in a big way.

    So no. Spending has risen dramatically mainly because of necessary stimulation. Revenues are down dramatically. Put it this way – revenues this year, 2010, are around 2165b – compare that to federal outlays back in 2007 – the last good year, before stimulus or anything like that – 2007 outlays were 2728b. In other words, current revenues would have yielded a large 560b deficit against even 2007 spending levels.

    When the country goes through a sharp recession like this, and revenues dry up – there are several alternative routes forward. One can borrow to make up the difference, raise taxes, or cut spending. Or a combination of the three. But it is disingenuous nonsense to claim that the problem “really” is just a spending problem. It “really really” is a revenue problem – one caused by the depressed wealth levels in the country. That is not an argument for trying to solve the problem only by increasing revenues – I personally favor some mix of the three alternatives – but I do make an argument for an end to this ideological nonsense that denies reality.

  18. Tano says:

    TANO, I reiterate: why is everybody using the term “tax cuts?” They were already cut and are now “tax rates.” Using that term “tax cuts” is simply part of the demagogy of class warfare. Wouldn’t you agree? It also muddies the argument.

    Sorry Pete, I sincerely do not understand your point at all. In my understanding of the English language, we refer to the specific percentage of taxes charged against income as a “tax rate”. If on one day, one particular marginal rate is, sqay 35%, and then through some legislative act, the next day it is 39%, we refer to that as an increase in the tax rate, or “tax increase” or “tax hike” for short. If it goes the other way. we refer to a “tax rate cut” or “tax cut” for short. I don’t see what you are driving at with your objection to these terms.

    I don’t see that it has anythign necessarily to do with “class warfare”. If you had a single tax rate for everyone, and you lowered that rate, it would be called a tax cut. What are you driving at?

  19. Pete says:

    My point is that the argument today is for tax rates to go up if the Bush rates are allowed to expire. Why are the existing tax rates still referred to as tax cuts? Using the term “tax cuts” engenders envy and resentment among people who are struggling to make ends meet. That is exactly what class warfare depends on.

  20. Tano says:

    Why are the existing tax rates still referred to as tax cuts?

    Because they were temporary cuts, designed to last 10 years, and then revert back to the preexisting rates. If you want these lower rates to continue, then you have to apply the cut again.

  21. Pete says:

    You say “to-mah-to,” I say “to-may-to.” I still think using the tax cut term is disingenuous and convenient for class warfare proponents.

  22. floyd says:

    If the Republicans had not taken the flatulence out of congressional sails with the midterms, this debate would not be happening, and the lowest tax bracket would see a 50% increase on January 1.
    This, in spite of gail-force obfuscation from the bully-pulpit and the toady media.

  23. ponce says:

    “and argues that the rather obvious economic effect of allowing tax cuts to go up across the board”

    It’s funny how long-discredited wingnut economic theories are rising from the dead now the Republicans have been given a little political power.

    Not surprising that the first act of the “small government” Republican majority is to jack up the national debt by $4 trillion.

  24. John Personna says:

    It’s rediculous to claim class warfare on the basis of a few points of marginal tax rate.

    Progressive rates are necessary to pay the bills.

  25. James Joyner says:

    @JP

    Pete is simply arguing that, since the Bush rates are the status quo, extending them isn’t a tax cut but a continuation of existing rates. The Dems are successfully using language to give the impression that they’re opposing tax cuts/giveaways/etc to “the rich.” And, yeah, that’s the language of class warfare.

    All this was not only predictable but predicted. The nature of “temporary” tax cuts is that, at the point they’re set to expire, a “tax hike” will ensue if the “temporary” cuts aren’t extended. And that’s a win for the low taxes politicians.

  26. Eric Florack says:

    @James
    Bingo.

  27. John Personna says:

    James, if you accept all that, what was “temporary” in the law?

    A lie to simple, honest, folk?

  28. John Personna says:

    ShorterJames: it’s your fault for believing me

  29. Tano says:

    Pete is simply arguing that, since the Bush rates are the status quo, extending them isn’t a tax cut but a continuation of existing rates.

    Actually, i think Pete got it right when he said “You say “to-mah-to,” I say “to-may-to.””. Unfortunately, he went on to get it wrong again.

    This is all silly semantics. The reality is what it is. Tax rates were at one level. They were lowered for an explicit time period. Now they are set to return to the previous rate. Call it a tax increase, or a revision to the status quo ante. Continue the lower rates and call it a tax cut, or an extension, or a making permanent what was temporary.

    “Class warfare” is just a propagandistic meme utilized by the right. As John P pointed out, it borders on the absurd to refer to a change in the top marginal rate of 4 points as warfare – returning the rate to what it was at a time of extremely strong economic growth, when those who had to pay those top rates got fabulously wealthy.

    The notion that those who are more successful in the economic marketplace that taxes help to establish and protect, should contribute at a somewhat higher rate is hardly some novel notion – it is deeply embedded in our traditions. That moneys earned and spent for the basic necessities of life should be taxed at a lower rate than money that would be spent for luxuries is also resonant with basic human concepts of fairness.

    I repeat, the issue here is resetting the top marginal rate to 39% from 35%. This is not confiscatory. To the contrary, given recent history, it seems to be a good approximation of that sweet spot where revenues can equal outlays, the economy can prosper, and the wealthy themselves can do extremely well. To call this “warfare” is just ridiculous.

  30. Davebo says:

    What James is ignoring is why the GOP enacted tax cuts that were designed to expire.

    We know why of course. James knows why as well.

    Which is why he’s not ignorant, just disingenuous. Sadly a common trait among the not ignorant Republicans these days.

  31. john personna says:

    Conservative: Here, I'[m enacting some temporary tax cuts. If you let them expire later, YOU are engaging in class warfare!

  32. Dave Schuler says:

    If we were having this debate about extending the Bush tax cuts in the middle of an economic boom rather than in the middle of a sluggish recovery that seems like it could come to an end any day, then it’s probable that the dynamics would be different.

    I’m not sure this is a completely credible argument since it suggests that Congressional Democrats were eager to terminate the cuts. If that’s the case why didn’t they move to repeal the cuts before the economic downturn when they took control of the Congress in 2007?

    My interepretation is that the Congressional Democrats have wanted to get rid of the cuts as long as they could do so without paying a political price and that’s essentially the position they’re in now.

  33. john personna says:

    The Dem’s first choice for recession response was stimulus. The public rejected stimulus. The Dem’s second choice for recession response was quantitative easing. The public rejected quantitative easing.

    The Dems are in a tough spot if the only politically acceptable recession response is the Republican game plan. Cut taxes (again) and wait for the magic (again).

  34. MarkJ says:

    Stan,

    “Democrats aren’t losing the debate. The public clearly favors their position.”

    Which “public” are you talking about? The one on Neptune? Mentally, that’s where most Donk congressmen are living these days. Only true Neptunians like Nancy Pelosi could truly dare to be stupid enough to claim that unemployment benefits “create jobs and reduce the deficit.”

  35. ponce says:

    “The Dem’s second choice for recession response was quantitative easing. The public rejected quantitative easing.”

    Really?

    Sarah Palin = The Voice of the Public now?

  36. anjin-san says:

    > Let’s imagine that by way of some grotesque fiat of the left we manage to take all of the income of those making over $250k. Every last penny.

    I am trying to imagine how somebody could possibly say something stupider that this, but I am stumped.

  37. Trumwill says:

    All this was not only predictable but predicted. The nature of “temporary” tax cuts is that, at the point they’re set to expire, a “tax hike” will ensue if the “temporary” cuts aren’t extended. And that’s a win for the low taxes politicians.

    What John Personna said. The only way you can credibly call the tax hike that would come with letting the cuts expire is to completely ignore this two-step. If Bush wanted to make it so that his tax rates would be the tax rates, he should have had the guts to leave off the word “temporary.” But by virtue of the fact that he didn’t, he makes this “class warfare” argument by the left actually, you know, accurate.

    If nothing happens, tax rates go back to where they were. Thus, those are the actual tax levels. Bush’s temporary cuts were statutorily (and sold to the public as) temporary. Not the new basic tax rate.

  38. jwest says:

    Geologists discover a rich vein of “unobtainium” on federal land. The proceeds from worldwide sales of this mineral provides the equivalent of the current federal budget.

    Would liberals still insist on taxing the “rich” on the basis of fairness?