Here’s something to ponder: If President Obama and Congress let President Bush’s tax cuts expire on schedule after 2012, annual budget deficits will fall to about 3 percent of gross domestic product (GDP), an economically sustainable level, over the next decade as confirmed by the new edition of Budget and Economic Outlook, an annual report released by the Congressional Budget Office on January 26. That would essentially solve the deficit problem over the near term before the aging of the population and rising health care costs make deficits a problem again after 2020.
The case for taking the simple, though politically charged, step of letting the Bush tax cuts expire is compelling.
For one thing, the economic timing works.
A weak economy in late 2010 provided some intellectual justification for Obama and Congress to extend all of the Bush tax cuts, which would have expired on December 31, for two years. The economy, which is gradually improving, will probably be strong enough after 2012 to absorb the hit that higher taxes will bring.
For another, the international financial timing works.
The financial markets will grow increasingly concerned in the coming months and years that Washington will never get serious about its looming deficits. Their sophisticated Washington watchers won’t be fooled by current efforts to slash discretionary spending, for they know that domestic discretionary spending is a shrinking share of the economy and isn’t driving the deficits we face.
The markets will only react to a signal of seriousness -- a Washington that bites the bullet by letting the tax cuts expire, and reduces deficits to sustainable levels for the near term will reassure our lenders to keep the money flowing.
The political timing works.
Yes, dangerous deficits will return after 2020. But by ending the Bush tax cuts after 2012, policymakers will buy themselves time to return to the issue of rising health care costs and perhaps even address it thoughtfully. Maybe a Democratic president and a Congress that will likely remain at least half in Republican hands after 2012 can take a bipartisan approach toward this undeniable driver of deficits.
To be sure, no elected official eagerly awaits the chance to raise taxes. But this opportunity may be just a bit less politically toxic than others, for it requires not action but, instead, inaction. The president and Congress merely need to not act, let taxes rise, and let the deficit fall.
Before my fellow bloggers rush to their keyboards to lament my political naivety, let me be clear that I’m not predicting this outcome. In election year 2012, the odds are far greater that everyone facing re-election – Obama, the full House, and a third of the Senate – will promise en masse to extend the tax cuts again.
Fine, but shouldn’t the alternative get a public hearing?
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.
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