Trial Balloon for Obama on Bush Tax Cuts

Peter Orszag, who stepped down just as White House budget director just a month ago, appears to have just floated an important trial balloon on a potential Democratic strategy for the Bush tax cuts. It comes in the form of Orszag’s debut column for the New York Times op-ed page, but it’s probably a good indicator of where the White House would like to go.

I just posted on this for the Fiscal Times:

Orszag proposes two departures from the current White House orthodoxy:

1) Extend all the Bush tax cuts for two years, even for the top 2 percent of earners – i.e., households with annual incomes above $250,000.

2) Let all the Bush tax cuts expire, including those for middle-income households, starting in 2013.

Here’s Orszag:

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

In short, Orszag is urging Obama to abandon his campaign pledge not to raise taxes “one dime’’ for anybody except the top 2 percent of taxpayers. Obama has already signaled that he was open to this possibility, when he instructed his bipartisan fiscal commission to put “everything on the table’’ in producing recommendations for cutting the deficit. My hunch is that Orszag would keep taxes low for many people, but not nearly as many as under the current Obama plan. He clearly wants this to be part of a broader reform that cleans up the tax system, but he nixes a Value Added Tax as politically impossible.

Orszag’s argument is in sync with Pete Davis’ prediction back in June that Democrats will end up punting on the Bush tax cuts until next year. Though Orszag left the White House at the end of July, he and everyone else knows that he is still closely identified with the White House. This appears to be his first substantive public comment since leaving, and it wasn’t an offhand remark in response to some question. I would be amazed if Orszag didn’t run it past his former colleagues first.

The idea of postponing a real decision until 2011 isn’t startling. Nor is the idea of giving a reprieve to high-income families, which a growing number of other Democrats support as well.

The bolder message here is that we should prepare to raise taxes in 2013 for households with incomes below $250,000.

It would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020. …Middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

Over the long haul, spending is probably the most important key to fiscal stability. But over the short- and medium-terms, raising taxes is the main tool available. Orszag:

Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years…..

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

Orszag is right about the options available. As much as conservatives rail about the need to cut spending, there is remarkably little room to quickly slash the deficit, beyond what will occur naturally as the economy recovers. That is not a message that American seem in any mood to hear or that either party wants to pursue. Perhaps the president’s bipartisan fiscal commission can help. One can always dream.

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