December 2, 2011
A year ago, the Bush tax cuts were set to expire. Barack Obama insisted that only those for people making less than $250,000 per year should be extended. Even though Democrats still controlled both the House and Senate, Republicans had enough clout to delay action until the last minute. At that point, they held all the high cards because they knew that Obama couldn’t risk a large de facto tax increase on every taxpayer at a time when the economy was weak. He caved and agreed to extension of all the Bush tax cuts, including those for the rich.
Today the situation is largely reversed. The temporary cut in the Social Security payroll tax is due to expire at year’s end, but this time Obama holds the better hand. Republicans are lukewarm to extending the payroll tax cut, but are caving to public pressure to extend it. Also, Republicans have never articulated a coherent reason for opposing extension of the payroll tax cut. But they insist that the tax cut be paid for—something they have never demanded for any Republican-sponsored tax cut that I am aware of.
Cleverly, Democrats have agreed that the budgetary cost of the tax cut extension should be offset and put forward a plan to tax the rich slightly more. Republicans are strongly opposed to that idea, favoring instead yet more budget cuts to pay for it. On Wednesday, they offered a plan to freeze the pay of federal workers, cut the number of federal workers by 10 percent, and cut government benefits for the rich.
The American people
higher taxes on the
wealthy, according to a
number of recent polls.
There is no possibility that the Republican plan will pass the Democratically-controlled Senate and serious doubt as to whether it can even pass the Republican-controlled House of Representatives. When this becomes obvious, Republicans will face a political dilemma because the American people overwhelmingly support higher taxes on the wealthy, according to a number of recent polls.
- A November 20 CNN/ORC poll found 67 percent of people support increased taxes on business and higher-income Americans.
- A November 20 United Technologies/National Journal poll found 55 percent of people favoring a limitation on itemized deductions for those making more than $250,000, and 53 percent favor allowing the Bush taxes to expire for this group.
- A November 10 McClatchy/Maris poll found 67 percent of people supporting increased taxes on higher-income Americans.
- A November 5 NBC News/Wall Street Journal poll found that 60 percent of people agree that the economic structure is out of balance and favors a small proportion of the rich over the rest of the country, and that the government should not provide tax breaks for such people.
Republicans respond that it would be folly to raise taxes on the “job creators.” But the idea that all rich people are job creators merely by virtue of being rich is complete nonsense. According to the Tax Policy Center, only about 3 percent of people reporting business income are in the top two tax brackets, and according to the Treasury Department, only one fifth of small businesses have any employees at all.
The bulk of income earned by the wealthy and by small businesses is passive, such as interest, dividends and capital gains. And dividends and capital gains have been taxed at a top rate of just 15 percent since 2003. That would not be affected by the Democrats’ proposal, which would add a 3.25 percent surtax to the tax rate applying to those with adjusted gross incomes over $1 million. Moreover, there is no evidence that the tax cuts of the George W. Bush administration created any jobs, so even if they were fully repealed there is no reason to think any jobs would be lost.
If Republican intransigence
causes the tax cut extension
to fail, Obama will have a
campaign issue he can ride
all the way to reelection.
At least some Republicans recognize these facts. On Wednesday, Senator Susan Collins of Maine suggested that it is possible to distinguish between rich people who genuinely create jobs from those that are mere rentiers. “I do not want to impose additional taxes on employers at a time when our economy is very fragile and we want to encourage them to hire,” she said. “On the other hand, I do believe that multimillionaires and billionaires who are not running businesses could pay more of their income to help us deal with the deficit.”
It is unlikely that very many Republicans would support the Collins plan. They are too fearful of the opposition from tax-pledge guru Grover Norquist who adamantly opposes any tax increase to pay for the payroll tax cut extension. They are also fearful of losing their brand as the anti-tax party.
However, Republicans may not wish to mount a scorched-earth campaign against a small tax increase on the rich to pay for a tax cut for the working class if their budget-cutting strategy fails. Obama and the Democrats would have a field day ridiculing them if did so. If Republican intransigence causes the tax cut extension to fail, Obama will have a campaign issue he can ride all the way to reelection.
As a veteran senator
once told me, you
can never go wrong
voting against a
bill that passes.
Therefore, I think Republicans will retreat just a little and allow a few Republicans to vote with Democrats on some sort of tax increase on the rich to pay for the payroll tax cut extension. Nor will they mount a serious filibuster in the Senate. That way they can keep their principles, while not preventing the extension to pass.
As a veteran senator once told me, you can never go wrong voting against a bill that passes.
The danger for Republicans is that Obama will get a big victory. But that matters less for members of Congress than those running for president who can say what they want about it. The bigger problem is that Republican defectors may face Tea Party opposition if they support a tax increase, even one coupled with a tax cut. However, a November 29 poll from Pew shows that Tea Party support has declined sharply even among Republicans. At this point, it may be a paper tiger that Republicans in Congress can safely ignore.