President Obama's Upper Hand on the Middle Class Tax Cuts

On Wednesday, the Senate voted 51-48 to extend the tax breaks for 98% of American income earners (bill text). At the same time, it also rejected a Republican effort to extend the tax giveaways for the rich, which got only 45 votes. Before I go any further on why this is a brilliant maneuver by Barack Obama and Harry Reid, here are a couple of little noticed things you need to notice from Wednesday's votes:.

  • First, the Democratic plan - the plan the Senate passed - includes not just extending the 2001 and 2003 tax rates for 98% of Americans, but also an extension of the tax breaks for the middle class that President Obama instituted: the expanded Earned Income and Child tax credits, and the American Opportunity Tax Credit. These are targeted tax credits for the middle class that provide true relief at a time of economic turbulence.
  • Second, and conversely, it would be a mistake to think that the Republican plan would have kept everyone's tax rates the same. The Republican plan would only extend the Bush tax rates for all taxpayers, resulting in an actual tax increase for middle class families as they would let the targeted Obama tax cuts expire.
So, both parties want to cut and increase taxes. It's just that Democrats want to increase taxes on the most fortunate who get all the breaks, and Republicans want to increase taxes on everyone but the most fortunate.

But, most political pundits are telling us that, oh, the House would never agree to pass what the Senate now has passed. Nah uh. Nevah. The pundits might be right. But let's remember that they were also telling us that Republicans would block it in the Senate too. Instead, Harry Reid took the filibuster off the table by proposing to allow a vote on the Republican proposal as well, then smartly passed the Democratic proposal and ensured a humiliating defeat for the Republicans.

Whether or not the House passes the Senate bill, this strengthens the hands of the Democrats, both politically and more importantly, in terms of policy. As the President has said on multiple occasions, he is happy to continue the debate on whether tax breaks for the rich should be extended, and ultimately, the people will make the judgment in November through their votes on the presidential ballot. But a basic policy that everyone does agree on is that taxes on the poor and the middle class should not go up. So why not avoid the fiscal cliff now, and see what happens in November?

Of course, this makes perfect sense. There is only one policy argument Republicans can make against this, and it is that they in fact want taxes to go up on everyone but the rich. Actually, that is no longer an argument. Both House and Senate Republicans have now voted for proposals that would do just that. And those votes are just recent examples of Republican policies of raising taxes on the everyone but the rich (in two ways - both by directly raising taxes as well as by cutting services) while cutting them for the wealthiest Americans. Another recent example was have been their votes to repeal the Affordable Care Act, which is the largest middle class tax break in history for health insurance.

Politically though, it is not an argument they are excited about selling. They don't actually want to come out and say, "Hey, yes, we think taxes should go up on everyone but the ultra wealthy." That's not a good election year zinger. So instead, they would have you believe rhetoric - that they want to keep taxes the same for everyone - that is patently false as demonstrated above. But now, the Senate has passed a bill. It will need to be conferenced and reconciled with the House. What will the House Republicans do?

Their options stink. They can give in and accept the Senate version of the bill - seeing as how in terms of policy, there isn't even a majority vote in the Senate to extend the tax boondoggle for the Romney class. Should they do so, Grover Norquist will have each of their heads on a platter so that he could proverbially piss on their skulls. They can simply refuse to compromise, in which case, President Obama politically gets what he wants: to run against an obstructionist Congress that is less popular than chicken pox. And of course, they will have Mitt Romney's support, which will make his campaign even more difficult.

There is a third option, that still stinks for the Republicans, but a little less. They can come to the table and figure out a compromise bill. Now, before every whiny liberal jumps down my throat for calling for compromise, let me describe what those compromises might look like:

One might be to actually overhaul the tax code to bring down the overall rates while taking away massive industry and individual-wealthy giveaways, and making moderate adjustments to entitlements along lines the president has outlined. That would be amazing for the country. It would also be a coup for the President and end all hopes of a Romney presidency. Rather unlikely.

Another, and a more likely scenario might come from something the Republicans were complaining about before and during the Senate vote. Some may think it an oversight, but I think Democrats quite astutely and intentionally left any adjustments to the Estate Tax out of Wednesday's vote. That means that according to this, the estate tax will revert back to 55% for estates over $1 million at the beginning of 2013. In addition, it also doesn't address dividend income, which means the tax rate on dividend income would go from a paltry 15% to whatever someone's actual marginal rate is. On these things, especially on the estate tax, there is room for negotiation - President Obama's own preference is a $3.5 million exemption, and a 45% tax rate above that. If Republicans ever wanted a face-saving amendment while not being blamed for raising taxes on the middle class, there it is.

But won't that also help President Obama? Yes. That's the point of this essay, in a way. After this vote in the Senate, basically whatever the Republicans do, the President comes out ahead. They either give the President a huge policy victory, or take the fall for holding the middle class hostage, in which case, the president's electoral case is bolstered, and the president takes the fight into the next year, as Patty Murray said, and gets the same result anyway (assuming he gets a second term).

I can already hear the cynics on the Left. President Obama did, after all, agree to a tax deal in 2010 that extended the Bush tax cuts for everyone (but also his targeted tax breaks), so why wouldn't he agree to it again? The reason really is quite simple, in terms of both policy and politics.

In 2010, despite the President's insistence, Democrats in Congress ran away from taking a vote before the midterms to let the Bush tax rates for the rich expire. So when the Republicans took control of the House in that election, and increased their numbers in the Senate, they were bolstered and would have let everyone's taxes go up had the president not made a deal. So the president offered them a deal that would extend it all, and add the payroll tax cut and extended unemployment benefits. That was both good politics and good policy. He got the Republicans to give up enough.

This time, though, Democrats in Congress have realized the mistake they made in 2010 by not taking the vote prior to the election. Hence the Senate vote. This time, the budget cuts, including in defense, looms from the debt limit deal. The stakes for real loss for the Republicans in terms of policy are much higher. And this time, the presidential election intrudes with a much more diverse electorate and a lot more people paying attention to the GOP's hostage taking. This time, the Republicans aren't just advocating for the uber rich, they have a standard bearer who takes $77,000 tax deductions for dressage horses. Politically, this time the president is coming off of a fresh victory in the Supreme Court on his health care law as the Republicans are getting beaten back trying to racially profile immigrants.

And one more thing. Probably the biggest reason why this time is different. This time, the president has an established record of being willing and able to compromise for the greater good. And the Republicans have spent the last two years (really, the last four) falling over each other to become more and more radical. That contrast, I will bet anything, is playing a much bigger role in the perception of this battle in the court of public opinion than any Congressional bickering. This time, the Republicans can't shoot the hostage - they need the hostage to vote.

This time, Republicans are backed into a corner. And it took a lot of laying of the groundwork to do so. The President has gained the upper hand with a lot of patience (and thankfully, by ignoring a lot of the screeching noise from the Professional Whiners on the Left), and he's using it masterfully.