How Obama Can Beat Gridlock: The Bush Tax Cut Expiration Will Force Compromise

Commentary about business and finance.
Sept. 6 2012 3:17 PM

Will Gridlock Destroy Obama’s Second Term?

Maybe not. The expiration of the Bush tax cuts may force a big legislative compromise.

U.S. President Barack Obama waves as he walks toward Marine One while departing the White House.
The Bush tax cuts may give Obama leverage with a Republican Congress in a second term

Photo by Mark Wilson/Getty Images.

Something’s glaringly missing from the Democratic National Convention: Any discussion of a second-term agenda for the Obama administration.

It’s understandable. He has a long record to defend, and defending it takes some rhetorical work. Meanwhile, it seems unlikely that Democrats will retain their Senate majority, even less likely that they’ll regain a House majority, and totally out of the realm of possibility that they’ll obtain the 60 Senate seats that would be needed to defeat Republican filibusters. And if there’s anything we’ve learned over the past four years, it’s that the GOP is not exactly eager to give Democrats even a sliver of bipartisan cover on any progressive legislation. So it’s been an offense-defense convention focused on the past and the alleged evils of Mitt Romney, rather than on an agenda for the future.

When pressed by reporters, Obama does offer an answer about the future. He envisions neither a return to the sweeping partisan legislation of his first two years, nor the grinding gridlock of his last two. Instead he thinks re-election will break the back of GOP obstruction and usher in a bold new era of bipartisan compromise. Unfortunately, his answer doesn’t make much sense, which is perhaps why he doesn’t bring it up.

After the election, Obama told the Associated Press, the American people “will have cast a decisive view on how we should move the country forward, and I would hope that the Republican Party, after a fulsome debate, would say to itself we need to listen to the American people.”

That’s a nice theory, which the past several elections refutes. The voters elected House and Senate Democrats in droves in 2006 and then elected a bunch more in 2008, along with sending a new president into office with the strongest majority of any president in decades. Republicans responded with endless procedural hijinks in the Senate, and Democrats were largely unwilling to fight fire with fire by exploiting the budget reconciliation process that allows for majority voting. Nonetheless, Democrats had a strong majority and got a lot of things done. Then they lost big in the 2010 midterms. The upcoming 2012 election is all but certain to deliver a less decisive outcome than 2008. Expecting Republicans to surrender when Obama is returned with a weaker mandate and minorities in Congress is naive.

Rephrasing the idea with a colorful metaphor about how the “blister” of conservative opposition will be “popped” by a re-election, as he explained to Time, does little to turn it into one that makes sense.

But what will make a difference if there’s a second Obama term is something else he doesn’t want to talk about—the specter of a gigantic tax increase. Right now that’s the ticking time bomb on the political calendar. Sitting alongside the large spending cuts agreed to in last year’s debt-ceiling deal is the expiration of the Bush tax cuts, the expiration of a large set of corporate tax credits, and the expiration of some stimulative payroll tax cuts agreed to the last time the Bush tax cuts were extended. The fact that all this is set to happen gives Obama something better than an electoral mandate: It gives him concrete leverage.

People forget, but the last time this happened—in the lame duck session that followed the 2010 midterms—an awful lot got done. In exchange for acceding to Republican demands for a two-year extension of the full Bush tax cuts, Obama got them to agree to the payroll tax cut and unemployment insurance extensions. And without getting Republican leaders necessarily on board for the underlying bills, he cleared the deck procedurally for passage of the New START arms control agreement, repeal of “don’t ask, don’t tell,” and a modernization of America’s food-safety system. What’s more, he didn’t even really make much of a concession. Liberals chafed that Obama was unable to fulfill his campaign pledge to raise taxes on the richest 2 percent. But over the past two years, low taxes have been somewhat useful stimulus (high-end tax cuts are not particularly cost-effective stimulus, but they’re worth something) and Obama preserved the leverage provided by automatic expiration. And it’s a good deal of leverage. Republicans have lots of notions about economic policy, but their core commitment is to low marginal tax rates for rich people and they’ll go to extraordinary lengths to secure them.

How will Obama use this leverage? I have no idea. Democratic staffers on the Hill are aware that the leverage exists, but are reluctant to discuss specific plans for using it lest they seem to be salivating at the prospect of tax hikes. But there are a few clear options:

One is to simply extend the full tax-cut package for a couple more years in exchange for some smallish Republican concessions. Replay the 2010 deal, in other words. This would upset Obama’s base, but be helpful for the economy and allow the White House to preserve their leverage.

Another is that the whole Bush tax-cuts controversy could be swept under the rug by the kind of bigger picture tax-reform—lower rates, fewer loopholes—that wonks dream up. This second option could be combined with the first, through some kind of extension-plus-commission option.

Last, and most interestingly from the standpoint of legislation, there could be a standoff. Obama could stick with his refusal to extend the high-end cuts, and the GOP could stick with its refusal to extend middle-class tax cuts unless the rich get in on the party, too. That would put taxes higher than either party wants and set the stage for dealmaking. The fruitless bargaining efforts of the current Congress have focused on Obama offering spending concessions in exchange for the GOP offering more revenue.

If the Bush tax cuts are fully rescinded, the script flips. Now we start talking about what spending concessions the GOP can offer Obama in exchange for lower taxes. Those are the kind of deals that play to both parties’ prejudices and make it likely that bills will pass. And the weird thing is that should this compromise-oriented future come to pass, it will be as a result of extreme gridlock. The “boil” of conservative opposition to Obama won’t be “lanced” no matter what happens in November. But if Obama wins and the two parties stay far apart on taxes, big legislation just might pass anyway.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.