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Republican Scam on "Not Raising Taxes": Why Democrats Should HOPE All the Cuts Expire

11/20/2012 08:03 am ET | Updated Jan 20, 2013

Grover Norquist and the Republicans are nothing if not good flimflam artists. They have convinced themselves and the media and the Democrats that they have adhered to a pledge never to raise taxes under any circumstances.

No one should continue to indulge this fiction. Republicans have voted to raise taxes. Repeatedly. They just did it again in 2010.

Consider, for example, the Bush tax cuts and their extensions ("BTCs"). The BTCs contained both a tax cut and a programmed tax increase. Republicans did not just vote for one provision, they voted for the whole thing. They can argue that their goal was always to amend it later to stop the tax increase upon expiration, but it is totally disingenuous to claim that Republicans had not voted for that tax increase already.

Moreover, the reason for voting for the BTCs to expire was their devastating impact on the long-term debt. [That was about the only prediction they made that has been accurate].

This is more than pure sophistry. Shorn of all their phony economic rationales against raising taxes on the wealthy (no, they do not "pay for themselves"; and no, they do not "create jobs" ), Republicans are left spouting "principles" against raising taxes.

Indeed, one wonders why Grover Norquist, the grim reaper of the "no-tax-increase-under-any-circumstances" pledge, has not primaried every single Republican. Each and every one of them violated that pledge when they voted for the BTCs.

Democrats should, therefore, ignore the tax part of the "fiscal cliff" debate and focus instead on the sequester. The tax issue is settled. It will come out one way (middle class tax cuts extended) or the other (no tax cuts extended), and that is in the hands of the Republican House leadership plus ~20 of their colleagues.

For Speaker John Boehner to corral ~20 of his colleagues to vote for the middle class tax cuts, they will also require some verbal armor against internal attacks on violating sacred "principles." They can remind their colleagues that they all have voted for tax increases each time they voted for the BTCs.

Democrats have passed a middle class only tax cut extension. There is no reason for any further discussion. Republicans' choice is to pass the middle class tax cut, or let all the BTCs expire. Democrats and the media should not consider that Republicans are "giving up" anything if they passed the middle class tax cut because they have already voted for the entire tax increase.

Interestingly, Democrats and the country will be much better off if the Republicans forget they have passed tax increases before, and decide to pass no extensions, for anyone.

Why? Because the BTCs have all kinds of goodies with which the Democrats can bargain in 2013 in order to enact some good economic policies.

If Republicans decide to let all the BTCs expire as they have repeatedly voted to do, they trigger, among other things: a return to the top tax rate of 39.6 percent; a return of the capital gains rate to 20 percent; a return of the top dividends' rate to 39.6 percent; a return of the estate tax to pre-BTC levels with a $1 million threshold and a 55 percent rate on estates over $1 million; the end of special treatment for "carried interest"; and a return of middle class tax rates to pre-BTC levels.

Not including the last effect, the revenue produced over the ensuing decade is $1.5 trillion from the top bracket and estate tax alone. The other provisions probably goose it up to close to $2 trillion. We have a $2.2 trillion deficit in infrastructure repair and a lot of people out of work.

Seems like a marriage made in high-speed rail heaven.

Once all the BTCs have expired, moreover, Democrats will have many, many bargaining chips. No one will heed the claim that there would be more job growth if the money were returned to the wealthy versus actually spending it on laying track, or repairing bridges or upgrading the electric grid. What would you choose -- a theory (that has now been largely debunked anyhow), or a real bridge repaired?

So, let us focus between now and January 1 on the sequester.

Republicans are antsy about the cuts to the military budget. Democrats are concerned about cuts to social programs.

So, here's a deal. For every dollar a Democrat agrees to de-sequester a defense expense, Republicans agree on an equal liberation on the social program side.

With the sequester undone, the fiscal impact on the economy will not be nearly as severe.

We can weather that storm for several weeks as the new Congress assembles on January 3.

At that point we will have a crop of new senators who will be loathe to relinquish needed revenues, but everyone will agree to axe the increases to the middle class that the Republicans allowed to occur.

There is also the opportunity for some real deal-making. Republicans will want a change in the estate tax. Okay, we can raise the threshold to $5 million, and reduce the tax rate to 50 percent. In exchange, we want the Republicans to pass the Buffet Rule.

Republicans will want the "carried interest" rules reinstated. In exchange, we want the American Jobs Act passed. We also want there to be linkage -- if the Buffet Rule is ever repealed, the "carried interest" rule is automatically repealed as well.

Now we're cookin'.

Republicans will want dividends treated more favorably than ordinary income. Okay, if they extend unemployment insurance until the unemployment rate is less than 5.5 percent for three straight quarters, we will agree to allow the first $50,000 of dividends to go untaxed.

If all the BTCs are allowed to expire, Republican interest groups will descend upon Congress quicker than stink on you-know-what.

It will provide the opportunity for some tough bargaining from which good policy can be enacted.

The President should signal that the only extension that he would sign is the middle class tax cuts. Otherwise, he throws away some juicy bargaining chips for nothing.