Stop me if you’ve heard this one before. Realizing they are on a collision course with popular opinion in an election year, a bloc of embattled Democrats tries to pull their party back from the ledge. Their rebellion is crushed as just enough Democrats decide to follow their leadership over the cliff to make some item on the liberal wish list a reality. Hilarity — accompanied by economic ruin — ensues.
This slapstick comedy debuted during the health care debate. The legislative battle over taxes has become the sequel. Rep. John Adler (D-NJ) led a group of 47 Democrats in demanding the extension of all the investment tax cuts, set to expire at the end of this year. Even such liberals as Rep. Michael Capuano (D-MA) asked for a swift vote on preserving the 2001 and 2003 tax cuts for people making less than $200,000 a year, ostensibly the Obama administration’s position.
Instead congressional Democrats voted to adjourn while leaving the tax issue unresolved, raising the possibility that taxes will in fact rise across the board. They voted to leave town by such a narrow margin that every Democrat who supported adjournment can plausibly be described as the deciding vote for letting the Bush tax cuts become the Obama tax increase. The election is a little more than a month away.
The main objection to keeping the tax cuts is that they’ll add to the deficit, a concern that did not prevent the $700 billion bailout, the $787 billion stimulus package or the $1 trillion health care boondoggle. But if so, why keep the tax cuts for the middle class? As economist Alan Viard points out, “The high-income rate reductions provide much greater incentive for investment and other economic activity, relative to revenue loss, than the middle-class tax cuts.”
In fact, letting the tax cuts expire for the higher earners will at best save $40 billion per year. Or to put it another way, an amount equal to about half of this year’s deficit over the next ten years. Factoring in other tax provisions that benefit those the Democrats deem wealthy can at most add another $30 billion a year. All this is wildly optimistic: the $40-70 billion is a static projection that assumes no one will alter their economic behavior in response to the tax increases or that they will have no negative impact on growth, particularly at the rates most responsive to tax changes. Ending the 2003 tax cuts on capital gains and dividends will likely have a negative influence on revenue.
But with the vote to put off any action on taxes until after the election, none of these technicalities really matter: taxes are scheduled to go up on everyone, not just the rich. “The Democrats have done more to change the rules on gays in the military, to provide amnesty for some illegal immigrants, and to name post offices in the last week than they have done to keep middle-class taxes from rising in the last Congress,” observed National Review‘s Ramesh Ponnuru before launching into a phrase that should be repeated by every Republican candidate this fall: “Taxes are going up for everyone, and it’s the Democrats’ fault.”
Some Democrats no doubt believe that Bill Clinton proved the economy can withstand tax increases. After all, didn’t the economy perform better under the Clinton-era tax rates than it is doing now? But this is a non sequitur. Clinton raised taxes during an economic recovery, slowing growth rates but not strangling it entirely. The most rapid growth actually came after the capital-gains tax cut of 1997. In this climate, taxes would be going up as the economy teeters on the brink of a double-dip recession with unemployment rates already approaching 10 percent. Meanwhile, it is very difficult to believe simultaneously in the deficit-reducing Rubinomics of the Clinton years and also the Keynesian pump-priming that has characterized the rest of the Obama administration’s fiscal policy.
And let’s not forget the politics. The more limited Clinton tax increases were an unmitigated political disaster that helped cost the Democrats control of Congress. Any guess as to how the voters will react to an across-the-board tax increase? Alvin Greene could run successfully as a Republican in such an environment.
Even if the party leadership is indifferent to the whining of their neutered Blue Dogs, one has to imagine that the Democrats will find their way back from the brink on taxes at some point. That is, if it weren’t for one inconvenient fact: such an expectation runs counter to the way the Obama-era Democrats have governed in practice.
Call it an adjournment of common sense.