Tuesday, September 14, 2010

Boehner v. McConnell on Taxes

By Mike Dorf

With House minority leader John Boehner having indicated that, if push comes to shove, he would support extending the Bush tax cuts even without including extension for families earning over $250,000, and with Senate minority leader Mitch McConnell standing firm in opposing any extension that does not include the whole package, it's easy to get sucked into calculating political costs and benefits.  One imagines that Rahm Emanuel et al are breathing a sigh of relief upon witnessing McConnell salvaging their political strategy for November.  Boehner's capitulation had threatened to rob Dems of their best argument against Repubs--that the latter are quite willing to sacrifice the welfare of the middle class and the working poor to protect the wealthy.

Here I want to note three other aspects to this story:

1) The debate is, in a fundamental sense, over something quite arbitrary.  The Bush tax cuts made a number of changes, but here I'll focus on just one: lowering the top tax bracket from 39.6% to 35%.  Which of these numbers is the "right" percentage?  That's a loaded question.  Clearly, there is a marginal tax rate that is too high. As the top marginal rate approaches 100%, the incentive to work (or, for those inclined towards cheating, the incentive to report income) approaches zero.  Likewise, as the top marginal tax rate declines, the revenue available for generally popular government programs (e.g., military spending, entitlements, aid to states) declines in proportion--at least in the range in which a difference in tax rates does not promote radically different behavior.  I think it's safe to assume that the difference between 39.6% to 35% is not so great as to affect incentives to earn an additional marginal dollar.  Indeed, it's not even obvious that "raising" the top rate from 35% to 39.6% would have a negative effect on work: Some earners with the ability to do so will work more, in an effort to keep their after-tax income more or less constant; others, with the prospect of keeping less, will work less; and many others still will likely be unaffected.  Because neither 39.6% nor 35% is obviously the "correct" rate in any deep sense, the public debate has focused, and likely will continue to focus, on the change from one regime to the other.

2) That brings me to the sunset provision.  When the Bush tax cuts were enacted in 2001 (and to some extent in 2003), many people thought that the sunset provision was a gimmick designed to limit the accounting damage from deeming the cuts permanent (at least in the sense that any legislation can be permanent, which is to say that it remains in effect until repealed).  But it's turning out that the sunset provision has real bite.  Dems are able to frame the debate as about whether to "extend" the Bush tax cuts rather than about whether to "raise" taxes.  To be sure, Repubs (and some others) resist that framing, but given the reality that the cuts will expire absent new legislation, the "extension" frame seems to be winning, at least for now.

3) The sunset provision also changes the dynamic on Capitol Hill rather dramatically.  It is highly doubtful that the Dems could break a filibuster if affirmative legislation were needed to repeal the Bush tax cuts.  But because they expire if not renewed, we have a game of chicken: a) Dems and Repubs alike want to extend the tax cuts for those earning under $250,000; b) Repubs alone want to extend the cuts for everyone.  Each side can thus hold the cuts for the lower earners hostage to their agenda, with the result that the least favored outcome occurs: Letting the cuts expire for everyone.

Although occupying an overall weak political position right now, the Dems have the stronger hand here.  In the event that no compromise is brokered, they can say that the Repubs stood by and watched the taxes of working Americans increase simply because they wanted to preserve lower taxes for the wealthy.  That's a good hand--arguably a better hand than actually getting Repubs to go along, a la Boehner.  And for that reason, I don't see Dems as taking the chance of bringing these issues to a full Congressional vote before the election, for fear that they might win the issue (with some Republican capitualtion a la Boehner) and accordingly sacrifice one of their few good campaign issues.