Why Obama Caved on the Bush Tax Cuts

By David Paul Kuhn

It's the liberal version of George H.W. Bush reneging on his "read my lips" tax pledge. Candidate Obama excoriated the Bush tax cuts for the wealthy. But Monday evening, President Obama tentatively agreed to extend those same tax cuts.

Call it compromise or call it caving, the deal will anger the Democratic base. It opens Obama to charges of hypocrisy. Perhaps Obama saw it as a raw deal. But he also likely believes it's the best deal he can get.

This partly comes down to votes. Democrats lack the 60-Senate votes to extend the tax cuts for earnings under $200,000. That left Democrats with two options: expire all or extend all.

Expiration was Obama's worst option. It amounted to bad policy and bad politics. Major tax hikes have a bad record in bad economies. And this economy has struggled to weather smaller headwinds. Democrats would also have to explain to all working Americans, not merely top earners, why their taxes rose in hard times.

Tax hikes have long been a political loser for Democrats. Many liberals argued that Democrats should blame Republicans for obstructing middle class tax cuts to win tax cuts for the rich. But Democrats retain control of Congress and the presidency (for a few more weeks). And they have learned a DC-axiom the hard way: the party that controls Washington accounts for Washington.

Imagine the Bush tax cuts expiring. The conservative Americans for Tax Reform currently have a "Countdown to the Biggest Tax Increase in American History." The most-cogent message wins debates. And Republicans have long had it on taxes.

Timing is another issue. Democrats waited until the eleventh hour to have this debate. Republicans were not going to let Democrats move to the next issue until the tax issue was resolved. This White House still hopes to ratify the new START treaty with Russia as well as end "don't ask, don't tell" this term. Republicans were also unwilling to extend unemployment benefits for about 2 million Americans without extending the tax cuts to the top income bracket. In the game of chicken, Democrats had more to lose. Democrats would also only have a worst hand next year, with a slimmer Senate majority and a Republican House.

The tentative deal was a political win for Republicans. But Obama has a deal he can stand on. If the deal comes to fruition, the package will extend the Bush tax breaks for two years in exchange for an additional 13 months of unemployment benefits. It will also cut payroll taxes to spur hiring.

The package will cost about $900 billion over the next two years. The deal comes only days after the deficit commission report, which urged serious action to combat America's long-term debt problem (or crisis).

Ironies abound. Democrats spent years railing against George W. Bush for not paying for his tax cuts. Democrats are now emulating the very actions they criticized. Republicans have spent two years preaching about the primacy of deficits. The GOP victory however means a tax deal that will likely prove more costly to the deficit than the stimulus package. This bi-partisan compromise is, oddly, politics as usual.

Obama said Monday evening the "framework" for the tax deal "was not perfect." Yet it's conceivable Obama saw an upside to losing this debate.

In Obama's ideal world, he would bolster programs like food stamps or extend the unemployment benefits independent of the tax cut debate. This is liberal orthodoxy. It is also however not without reason.

Consider the math of Mark Zandi, chief economist of Moody's Analytics and a past-advisor to both parties. Zandi calculates that every dollar spent on food stamps, for example, has a $1.74 impact on the economy (the money goes entirely to goods). The bang-for-buck for extending unemployment benefit is $1.61 (unemployed spend what little they have to stay afloat). By comparison, Zandi calculates that extending the Bush tax cuts will only have a 32-cent impact on the economy for every dollar (affluent earners feed government coffers but they are also more likely to save their tax cut, and therefore not greatly stimulate growth).

But Obama lacks the coalition to win his ideals. That ship sailed long ago. And Obama's political recovery is tied to the economic recovery. Obama will take what stimulus he can get.

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