John Boehner Is Bluffing On Taxes

A blog about business and economics.
Nov. 12 2012 7:40 PM

John Boehner Is Bluffing On Taxes

My position is that when it comes to the looming expiration of the Bush tax cuts, John Boehner is bluffing. If Obama holds firm and refuses to sign a full extension, then we'll get a new high-tax baseline in the new year at which point Boehner will agree to an Obama middle class tax cut package. To be sure, he'll probably insist on a face-saving modification or two to whatever Obama proposes and unless Obama is a fool he'll let Boehner save some face. But fundamentally, if we go "over the fiscal cliff" we're not going to end up at the bottom of anything—we'll just end up with roughly Obama's policy preferences.

Josh Barro, uncharacteristically, has this all wrong:

Democrats cannot force Republicans’ hand unless they are more willing than Republicans to let all the Bush tax cuts expire. And they won’t be. A full expiration might well cause a new recession, which would be even more politically damaging for the Barack Obama administration than for congressional Republicans. Congress is already about as unpopular as it can become, and Republicans know they are not going to get their legislative agenda enacted in the next two years anyway. But a new recession would greatly interfere with Obama’s second-term plans.
The situation is essentially the same as it was in 2010: Republicans are prepared to incur significant political costs to defend their position on the top tax rate issue, and Democrats cannot accept the economic damage that would come from a major short-term tax increase. As the party more willing to go off the cliff, Republicans will get their way. The fact that Democrats are coming off a strong electoral outcome does not matter.
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This is mistaken. There will be no recession unless the GOP refuses to pass middle class tax cuts. And they won't refuse to pass middle class tax cuts. It's true that Obama can't force them to pass middle class tax cuts. They'll pass them because they'll want to pass them. Why will they want to pass them? Well, because Obama's proposal for middle class tax cuts happens to substantially reduce rich people's tax bills. The whole debate right now is over the marginal rate applied to income above the $250,000 threshold. The so-called "middle class" tax cuts regard the rates paid at lower brackets. But rich people pay those middle class rates too. Whether you have $45,000 or $450,000 or even $4.5 million in taxable income the "middle class" tax cuts cut your taxes. And Republicans will want those tax cuts.

What made the 2010 lame duck session different is that Obama had a substantial non-tax agenda. Agreeing to a deal on tax cuts let him pass the repeal of Don't Ask Don't Tell (recall that at the time Obama was opposed to marriage equality, so it was crucial to have a deliverable to gay backers) and get START II and get some stimulative measures in the form of payroll tax cuts and Unemployment Insurance extensions. And in exchange, he didn't really give anything up. His leverage was intact in the event of reelection, and taxes would have just been cut if he lost. It was a pretty solid deal.

But heading into the winter of 2012-2013 there's nothing comparable to the DADT and START II issues that gives Obama an incentive to achieve a resolution during the lame duck. And once we're already at the new baseline, Republicans will agree to middle class tax cuts for the usual reason Republicans do things—doing so will make the rich richer.

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