Tax cut smackdown: Obama vs. Boehner (and Orszag)

President Obama and House Minority Leader John Boehner both want to extend tax cuts for the middle class, but have squared off over cuts for the wealthy.

The outlines of the Great Tax Debate of 2010 are coming clear. Yesterday, President Obama insisted on permanently extending the 2001-2003 tax cuts for those making less than $200,000 while allowing those aimed at the highest earners to expire at the end of the year. By contrast, House Republican leader John Boehner (R-OH) said he wants Congress to temporarily extend the Bush-era tax cuts for everyone. Boehner took his cues from an op-ed in Tuesday’s New York Times by Peter Orszag, Obama’s former budget director, which included a similar proposal for the next two years.

Who has the better argument? I disagree with all three of them, but if I had to choose, I’d go for the Boehner/Orszag short-term solution. Before I explain why, it may be helpful to clarify a few issues.

First, while fun, this argument is not all that important. A ‘permanent” tax cut is a fiction. No tax cuts are forever. Congress amends the Internal Revenue Code annually, and sometimes more than once a year. Since World War II, it has done a major overhaul about once a decade, and is overdue for its next renovation. And given massive budget pressures, one is likely to come sooner rather than later.And when it does, the entire Code will be in the mix, notwithstanding what it permanent and what is not.

At the same time, our recent experience with four dozen allegedly time-limited tax cuts that Congress extends more or less routinely each year suggests the word “temporary” does not carry the same meaning in Washington as it does elsewhere.

However, there are reasons why this debate does matter, at least inside the Beltway. To start, there is the matter of budget accounting. By offering a two-year extension of the 2001 and 2003 tax cuts, Boehner can make the 10-year cost of continuing the tax cuts for high earners look like a relatively modest $75 billion, far less than the than the $700 billion, 10-year price tag of a permanent extension. By contrast, making tax cuts permanent only for those making less than $200,000 forces Congress to build the $3 trillion, 10-year cost of Obama's plan into future budget baselines, while keeping tax cuts for high-earners out. The result: If the GOP does take control of Congress, it will have to scramble to find the money to pay for restoring tax reductions for those in the top brackets, or explain why it is "busting the budget" to do so.

Btw, it is important to note that while both Boehner and Orszag would both extend all the tax cuts for a couple of years, their long-run proposals differ profoundly. Orszag would let all the Bush-era tax cuts die after 2012. Boehner, by contrast, would not.

But my biggest objection to the Obama plan is that is manipulates expectations. It implies that the nation can solve its budget problems by simply raising taxes on the wealthy. But this is not possible. As a recent Tax Policy Center study showed, even trying to do so would result in top rates approaching 80 percent. One day, a president and Congress will have to agree on a deficit reduction package that raises taxes across the board and cuts spending. That’s when those allegedly permanent tax cuts will disappear. Pretending otherwise is irresponsible.

As I’ve written previously, I wish Obama and Congress could agree on a brief extension of only those tax cuts that are most likely to boost the short-term economy. But if that isn’t going to happen and we are forced to choose between the Obama solution and the Boehner/Orszag package, I’ll reluctantly take a temporary extension for all.

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