Will Dems fall for temporary tax cut gambit (again)?

By Len Burman, guest columnist

NEW YORK (CNNMoney.com) -- Commentary: Burman is Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School at Syracuse University. He cofounded the Tax Policy Center, which he directed until 2009, and served as deputy assistant Treasury secretary for tax analysis from 1998 to 2000.

It's baffling to me that the Obama Administration, home of some of the smartest policy geeks since JFK's Wiz Kids, never seems to look more than one move ahead on the policy chess board. The latest example is the tax "compromise" with Republican leaders.

In the short term, there's a certain logic to giving in. Yes, passage of the middle class tax cuts and extended unemployment benefits won't happen without Republican support. Yes, the Democrats will be even less able to control the political agenda when the Republicans take control of the House in January. And, yes, letting all the tax cuts lapse would hurt the fragile economy.

But in the long term, the consequences of the "deal" could be devastating. Here's my nightmare scenario:

Think ahead two moves, to 2012, when this temporary deal expires. Many forecasters think the economy will still be fragile, so you can expect Republicans to argue that it is no time to raise taxes.

And it's very possible if the economy remains weak and/or Obama doesn't find his mojo, that there will be a Republican president and a Republican senate.

At that point, Republicans might well not agree to another temporary extension of the tax rates. Instead, they'll wait until they control government to introduce HR1 in the 2013 Congress -- a permanent extension of the Bush tax cuts that the new president will sign triumphantly.

Permanent extension of the Bush tax cuts would do considerable harm to the economy. The debt is projected to rise by $10 trillion over the next decade. The tax cuts represent 40% of that total.

We need to cut spending too. But halting the clearly unaffordable tax cuts - all of them, not just for the rich -- would be a good start at getting the budget under control.

If we don't, under the best case scenario, interest rates will rise pushing up the cost of homeownership and business investment, and thus slowing economic growth.

In the worst case, rates will stay low for a while, and then explode when investors figure out that we've passed a point of no return. When the bubble bursts, we will be an economic basket case like Greece or Ireland. Unlike those small countries, however, we'll bring down the world economy with us.

The Presidents' people will say that letting the tax cuts expire would increase the chance that Republicans take the White House in 2012. Maybe. I don't see how the failure to extend middle class tax cuts because of Republican obduracy gets pinned on Obama. Recall the 1995 government shutdown, which worked out rather well for President Clinton after he refused to capitulate.

And the Republicans would have a much harder time rationalizing $4 trillion in tax cuts if they're not already embedded in the law.

If Obama stood firm and the Bush tax cuts expire at the end of 2010, the president could recast the debate to discuss the kinds of temporary measures that could boost the economy most.

A Bipartisan Policy Center panel that I served on suggested a one-year payroll tax holiday, which would pump $650 billion of stimulus into the economy in 2011. Under this plan, both workers and employers would get a pass on the 6.2% of pay they contribute to Social Security. Workers would have more cash to spend and employers more incentive to hire.

This is much more effective than the newly proposed payroll tax break -- 2 percentage points of the workers' portion, which amounts to $120 billion. And it's a far more effective strategy than the tax cut extension, and one that many Republicans have supported in the past.

The Bipartisan Policy Center also proposed major tax reform to make the tax system simpler, fairer, and more conducive to economic growth. The Bowles-Simpson panel made a similar proposal. Federal Reserve chairman Ben Bernanke called for tax reform on "60 Minutes" this week, as did President Obama himself at a press conference on Tuesday.

Most frustrating, the Republicans would not have been able to corner the president on taxes if he'd actually proposed his own replacement for the Bush tax cuts in 2009. On the campaign trail, he slammed the Bush tax cuts for ballooning the deficit, but then he incongruously promised to extend almost all of them. That failure to look more than one move ahead on the chess board led to the current endgame.

Checkmate in 3. To top of page

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