Monday, December 6, 2010

The Obama Tax Cuts and Bargaining

I think Ezra Klein is probably correct about the policy behind the coming deal on tax cuts.  But I think he, and most everyone else, is thinking about the politics of how we got here through the wrong lens.  Oh, it's clear that Barack Obama and the Democrats are making a trade they didn't want, and in that sense are losing.  But they're winning something, too.

Actually, the best way to think of this is in the context of a post that Klein wrote (if I recall correctly) last spring, in which he noted that Republicans could have had whatever they wanted on health care in exchange for their votes.  What I think happened here is that instead of the rejectionist strategy Republicans have used on most issues, on taxes Republicans and Democrats both wanted substantive results -- and that, given the party breakdown in the Senate, made a trade-off close to inevitable.

Here's how I get to that conclusion.

First, following Matt Yglesias (here and here), it's important to remember that the context of the entire fight is that Barack Obama and the Democrats really want the middle-class portion (as they define it) of the tax cuts.  Whether that's a "sellout," as Yglesias tags it, or a sincere preference, or some combination isn't really relevant: what's relevant is that the Democrats campaigned on keeping rates the same for those below a set income level.  In other words, it's part of the Obama/Democratic agenda, the same as health care reform, banking, or environment/energy.

Now, Dave Weigel is correct that Democrats across the board did oppose tax cuts for rich people.  But the context for that was always about a positive agenda that included keeping tax rates for everyone else at or below Bush levels.  And, as far as I can see or recall, that was not a particularly controversial issue among Democrats in 2008.  It was simply part of the mainstream (liberal) agenda.

Second, following Paul Waldman and Jonathan Chait (and others), note that Republicans really do care quite a bit about upper level tax rates -- and, importantly, consider Chait's argument that Republicans are basically indifferent about tax rates for everyone else. 

If all of that is true, then it goes a long way towards explaining the tax cut outcome.  This goes back to Ezra Klein's comment about health care, in which he realized that Republicans could have had achieved practically any substantive policy concerns in exchange for a few votes.  The same was true on the other major Democratic priorities.

Understanding the tax cut debate just requires seeing that this is another of the Democrats' big agenda items -- only this time, Republicans are playing for the substance, not the issue.  And with both sides having substantive goals that they really care about, and neither having the votes to get there on their own, a deal makes lots of sense.  Indeed, seen from this perspective, the eventual deal isn't bad at all for the Democrats; they'll be getting the middle class cuts plus whatever other stimulus and safety net they can bargain for, while the GOP gets, well, the only thing they seem to care about in domestic policy.

Part of the confusion is that everyone is so used to seeing Republican rejectionism that they don't recognize accommodation (that is, willingness to make a deal that gives both sides policy gains) when they see it.  Perhaps another part of that confusion is that this may be an issue in which liberal activists really do part ways with the bulk of Democratic voters.  It's surely the case that among liberal activists, climate/energy, immigration, and several other issues are a much higher priority than the tax cut pledge.  But for many Obama voters, that's probably not true.

I'd also say that I agree with those who believe that the Democrats' spin on this issue has been far from impressive, although as usual it probably made little difference.  Still, it's made no sense at all for Barack Obama and the Democrats to publicly support anything called "the Bush tax cuts."  From the start, or even from summer 2010, it sure seems that it would have been a lot smarter to invent something called "the Obama middle class tax cuts" and supported that as an alternative to Bush tax cuts (or, even better, Bush tax increases).  Indeed, Obama could have outbid the Republicans on the "middle class" portion of the tax cuts, opposed tax cuts for the rich, and still had plenty of money left over.  Framing the whole thing along GOP lines never made any sense.  On the other hand, at the end of the day the Democrats' position was still popular, so it's not easy to see what was lost in losing the spin war.

Back to the analysis...the case rests on four assumptions: that Republicans care a lot about upper level tax rates; that Republicans are basically indifferent about tax rates for everyone else; that Democrats care quite a bit about tax rates for everyone outside of the wealthiest Americans; and that neither side has the votes to impose their preferred policy on their own.  We don't really know whether any of those assumptions is correct -- we get to hear everyone's rhetoric, but that doesn't always match with their real intent.  However, if these assumptions are correct, then the way this issue has played out makes lots of sense.


  1. Re the correctness of the assumptions (1) "that Republicans are basically indifferent about tax rates for everyone else [except for the rich]" and (2) "Democrats care quite a bit about tax rates for everyone outside the wealthiest Americans."

    Didn't Republicans pass what we now call the middle class tax cuts over substantial Democratic opposition in Bush's first term? Does it make sense to assume that they've suddenly become indifferent to rising middle class tax rates now, especially when they're promising to pass an across-the-board extension of the Bush tax cuts as the first act of the new Congress if they're allowed to expire during the lame duck session? I think starving the big government beast has always been, and still is the prime Republican objective. Middle class tax cuts still serve that end.

    Democrats' support for lowering middle class tax rates, on the other hand, is (and should be) circumstantial. It makes sense as the best available demand-side stimulus measure when there's 10% unemployment and monetary policy is largely tapped out. But that doesn't mean it's a good idea once the recovery has progressed far enough that monetary policy regains its traction. Under those circumstances, the distinctively liberal why of giving tax relief to the middle class is through well-targeted tax credits and deductions which get more effective as tools of economic regulation and redistribution the higher underlying tax rates are.

    If you ask me, the idea that the Democrats are the party of middle class tax RATE reductions isn't selling politically because everyone knows its an ephemeral phenomenon.

  2. I don't see much reason to think those four assumptions aren't correct.

    I just wish Dems would get the spin right once so we can at least be more confident in saying that it probably didn't matter.

  3. Ron,

    I can't say for sure. I do think that there's a good case that can be made for it -- and that Democrats certainly campaigned this time around for the "middle class" tax cut. But, yes, if circumstances were different, perhaps they wouldn't have. As for the GOP, again, I think there's a good case that can be made that they think of the lower-level cuts as a way to buy what they really want, but it's not easy to know whether it's true or not.


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