Politically Taxing

Tired of the debate over whether or not to extend the Bush tax cuts?  Me too.  Maybe this'll cheer you up.

As you know, the Bush tax cuts came with an expiration date: 31 December 2010.  Since they were passed in 2001 and 2003, whatever their consequences for the US economy, they have proved nevertheless to be an extremely rich source of political leverage for both parties.

For Democrats, the talking point has been that they unfairly benefit the rich at the expense of the poor and working class.  Over the last decade or so, the phrase "tax cuts for the rich" has been uttered by Democrats untold thousands of times.  Moreover, as Democrats have also argued, the cuts deprived the government of revenue that could have been used to reduce the budget deficit and national debt.

For Republicans, at least until 2008, the cuts were held to be the most immediate reason for the robust economy, the extremely low unemployment rate that attended it, as well as the huge windfall of tax revenue that streamed into the federal government's coffers as a result.  Since 2008, their argument has been that it would be economically foolish even to consider raising taxes during a recession.  Consequently (and throughout both periods, actually), their looming expiration has served to provide the GOP with the reliable rallying cry, "Make the tax cuts permanent!"

It sounds to me, at least rhetorically, like a political win-win.  But, as we begin the last month of the Bush cuts today, does anyone seriously doubt that before New Years' Eve, the Democrats will finally cave and extend them? 

If this is so, is it possible that the Republicans have stumbled onto a winning strategy for passing tax cuts in the future?  It occurs to me that with every proposal of theirs to reduce tax rates, the Republicans should include just such a sunset provision.  Why?

Imagine a Democrat congressman or senator who occupies a marginal seat.  While he and his party remain ideologically opposed to cutting tax rates, when confronted with a bill to do just that, he, if not his party, finds it politically difficult to oppose.  If such a bill came with a sunset provision, however, it might offer him with a way to have his cake and eat it too.  If the bill included an expiration date, a provision that he could even be allowed to demand publicly and indignantly, he could seem thereby to remain more or less loyal to both his party and his ideology, while at the same time still provide his, "one-time", to be sure, vote for it. 

With this strategy, the GOP just might peel off enough Democrats to get such a bill passed.  But it gets even better.

When the expiration date finally approaches, in order to argue for extending them, the Republicans can use exactly the same rhetoric they're using now to extend the Bush tax cuts, and with exactly the same result, i.e., the Democrats will likely give in.  And while the Republicans should insist on making the making the cuts permanent, as they are also doing now, they can use that demand as a bargaining chip.  That is, if the Dems will vote to extend the tax cuts, the GOP will concede, again, an expiration date, and again, and again,....

The downside of this strategy is that uncertainty over the precise nature of next year's tax rates will cause many a business that might otherwise be prepared to risk producing a new product, building a new plant, or hiring a new employee, instead to wait and see what happens.  By doing so, it will have the effect of dampening the economy.  Uncertainty over the Bush tax cuts has accomplished precisely this and, as a result, served to prolong the recession.

But, I'm afraid, when it comes to economics, arguing with a Democrat is like arguing with a child.  And at least sometimes when dealing with a child, child psychology is warranted.