Over the past week or so, Bill Clinton, Larry Summers, and Glenn Hubbard have all made the same suggestion: Congress should extend all of the 2001/2003 tax cuts, due to expire at year’s end, into early next year.
It seems like an awful idea.
I suspect they have different motivations for this advice. Clinton, ever the master political strategist, may have done a calculation about President Obama’s re-election: Uncertainty over Taxmageddon is dampening the animal spirits that drive economic growth. And it is that growth, or its absence, that will largely decide whether Obama will remain in the White House after January.
Thus, Clinton’s public intervention may be intended to convince the president to take that uncertainty off the table now by urging Congress to extend the tax cuts into 2013.
A 3-month delay doesn’t change fiscal reality in any way, but Clinton may be hoping it improves perceptions by getting the end-of-year train wreck out of the headlines. Out of sight, as they say….
Summers, who was a top economic adviser to both Clinton and Obama, may simply be worried about what appears to be another slowdown. “We’ve got to make sure we don’t take gasoline out of the tank at the end of this year,” he said on CNBC’s June 6 Morning Joe program.
Hubbard, a senior economic adviser to President George W. Bush and Mitt Romney, may have something else in mind entirely. He told the Wall Street Journal on May 29 that he’d like to see the tax cuts extended into early next year as well. That would give Romney the flexibility he needs to enact his own substantial tax reduction.
If Congress votes this year to make permanent all the Bush-era tax cuts—except for those for high-income households– a newly-elected President Romney would have much less maneuvering room. The official deficit would look a lot bigger than it does today and Senate Democrats would have plenty of leverage to block Romney’s tax initiatives.
Since it is likely that the debt limit won’t be reached until sometime in the first quarter of next year, Democrats would be happy to force Romney to tie tax cuts for the rich to a painful vote to increase the U.S. borrowing authority.
Of course, while Clinton, Summers, and Hubbard (it only sounds like a white shoes law firm) want to kick the tax debate into next year, they disagree on what to do after that. Clinton and Summers want the tax cuts on those high earners to expire at some point. Hubbard, or at least Romney, would not only continue them, but expand them. And cut taxes for most everyone else as well.
Obama, for his part, insists he is sticking by his guns. He wants Congress to make permanent the 2001/2003 tax cuts for those making less than $200,000 (or couples making less than $250,000) but insists that lawmakers allow them to expire for the highest income households. Of course, Obama said the same thing in 2010 and eventually blinked, agreeing to continue them all until the end of this year.
While both Obama and Romney partisans think there are good political reasons to put off the inevitable until early next year, in the real world a short-term extension of those tax cuts seems like a terrible idea. I can’t think of much worse tax policy than extending virtually the entire Revenue Code for a few months at a time.