Boehner's Obama Gamble

• JULY 9, 2011

A tax increase now for the promise of tax reform later won't fly.

 

President Obama wants Congress to raise the $14.3 trillion national debt limit, which means he needs House Republican votes. Yet Mr. Obama and the Washington chorus are insisting that in return for doing him the favor of voting to raise that limit, Republicans must also do him another favor by raising taxes.

That's the larger political context for the news that House Speaker John Boehner and Mr. Obama have agreed to go for a big bang debt-limit deal that cuts spending and raises taxes far more than everyone expected. The target is now said to be $4 trillion over 10 years, though that's far less important than the details, which are still murky.

But we're told that the essence of the deal is that Mr. Obama is willing to put larger cuts in Medicare and Social Security and the promise of tax reform on the table, if Mr. Boehner agrees to let the current tax rates on capital gains, dividends and the top two tax brackets expire after 2012.

We can't fault Mr. Boehner for trying, and his arguments for doing so carry some weight. The thinking is that cuts in entitlements must be done on a bipartisan basis, Mr. Obama has incentive to deal to shed his big-spending reputation, and even if Republicans win Congress and the White House in 2012 they won't be able to do much against united Democrats. The Speaker thinks that if he can get Mr. Obama's consent now to put spending on a downward path to 19% of GDP over time (from 24% or so), it is worth moving on taxes.

View Full Image

Reuters

We trust Mr. Boehner also realizes this is a high-risk game for the economy and his House majority. Especially risky is his willingness to "decouple" the Bush tax rates for the middle class and upper incomes. The White House is insisting that as part of any deal the current tax rates on the middle class—the child tax credit, etc.—would be made permanent, while the lower rates on capital gains, dividends and the higher income brackets would expire after 2012. Taken by itself this would be a tax increase pure and simple and violate the GOP's campaign pledge.

But here's what we're told is Mr. Boehner's political kicker: The proposed deal would also include some kind of "trigger" device, so far undefined, that would compel House and Senate negotiators to complete tax reform discussions over the next several months. We're told the White House has said it is open in principle to a top rate of 35% on individuals and something like 26% or 27% on corporations—in return for closing various loopholes.

More troubling than these details is the staggered timing. Republicans would be putting their fingerprints on a tax increase in return for spending cuts as a first order of business, which would raise the dividend and top income tax rates to 39.6% (from 35%), or 41% if you include the phase-out of deductions. (Plus the 3.8% payroll tax hike baked into ObamaCare.) Only then would Mr. Obama and the Democrats negotiate the details of tax reform and lower overall rates.

But why at that point would Democrats want tax reform? They'd have achieved their main political goals of a huge debt-reduction deal, getting GOP cover for a tax increase, and putting Republicans cross-wise with the tea party. Raising tax rates first also makes the math of tax reform that much harder to negotiate on both revenue and income-distribution grounds. Under the Beltway's scoring rules, cutting rates would look like an even bigger gain for higher-income folks and an even bigger revenue loss for the Treasury.

In other words, Mr. Boehner would make his ultimate goal—tax reform—that much more difficult to achieve politically. And that's assuming the entitlement cuts he gets are genuine—not merely cuts to doctors or hospitals that won't happen in practice. It also assumes that the "trigger" for tax reform is strong enough to override liberal obstruction in the Senate. We'll see a unicorn first.

Meantime, such a deal would signal that tax rates are more likely to rise in 2013, which won't help the listless economy. Only yesterday, in response to the June 9.2% jobless rate, Mr. Obama called for an extension of this year's payroll tax cut. So he wants to increase the deficit by extending a payroll tax cut that has coincided with higher joblessness, while raising other taxes in a way that would reduce investment that would create jobs. Republicans who embrace this logic deserve the tea party's disdain.

***

Tax reform is a worthwhile policy goal, and Mr. Boehner is right to pursue it. But the only way he can avoid being taken for a ride by Democrats is if all parts of any deal are negotiated, voted on and then implemented immediately. Two men, one deal, once. Promises of future action aren't credible.

Even if Mr. Obama is sincere on tax reform, he can't guarantee he can deliver Senate Democrats who are desperate to keep their majority in 2012, much less Nancy Pelosi. We're told that in Thursday's White House meeting, Mr. Obama promised to veto any short-term debt-limit deal to give the two sides more time to negotiate. If that's true, then the President isn't serious. It means he is using the pressure of the August 2 deadline to bull-rush Mr. Boehner into a bad deal.

If Mr. Obama is sincere about a long-term spending and tax reform agreement, he'll take the time to get it right. If he insists on issuing ultimatums, then House Republicans would be better off passing a debt-limit ceiling for a few months with comparable spending cuts and letting Senate Democrats do the same. Mr. Boehner shouldn't bet his majority on Mr. Obama's promises.