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As Tax Cut Theater Continues, A Deal Looms As Tax Cut Theater Continues, A Deal Looms

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White House / ANALYSIS

As Tax Cut Theater Continues, A Deal Looms

Washington's had 10 years to figure this out. Now it's down to the last weekend.

Treasury Secretary Tim Timothy Geithner, shown here in March, is one of the president's negotiators trying to break a tax impasse. His partner is Jack Lew, the director of the Office of Management and Budget(Richard A. Bloom)

photo of Matthew Cooper
December 3, 2010

Talk about procrastination.

For 10 years, Washington has known that the Bush tax cuts were due to expire. After all, when Congress passed the cuts in income tax rates back in 2001 they built in an expiration date as part of a compromise in order to get them passed.

Now, unless President Obama and Congress act by the end of the year, rates will go up on all Americans who pay income tax.

 

Fully 47 percent of Americans pay no income tax at all, but they’re affected by other provisions that will change unless lawmakers act.

What’s going on in Congress now is brinksmanship. It will almost certainly be followed by some kind of deal that will keep taxes at the same rate for most, if not all, Americans.

Like so many Americans who wait until April 15 to file their income taxes, Congress is ready to brew the coffee, take out its depreciation schedules, and pull an all-nighter, if not literally—although that could yet happen—at least figuratively.

The bottom line is that neither side can get everything it wants. The Republicans want the Bush tax cuts extended for everyone. The Democrats want them extended for incomes less than $250,000—all of which is a bit ironic since everyone says they want to cut the deficit. But neither side has the votes.

So between now and a final deal, comes lots of what might be called “Tax Cut Theater,” with the real work going on behind the scenes.

On Thursday, the House of Representatives passed a measure extending the cuts just for the lower earners. The idea was to embarrass Republicans and make them seem like protectors of the rich.

But some 20 House Democrats who were voted out of office in November also voted against the measure, showing fissures in President Obama’s party. On Saturday, the Senate Democrats will schedule more votes—and lots of procedural maneuvering—aimed at the same goal: embarrassing Republicans. It won’t pass because the votes aren’t there.

As so often happens, the real work is getting done behind the scenes. Obama has Treasury Secretary Tim Geithner and Office of Management and Budget Director Jacob Lew—a pair considered pretty apolitical as far as Washington goes—to be his negotiators on this topic with congressional Democrats and Republicans. So far they’ve met with key Republican officials like incoming House Ways and Means Committee Chairman Dave Camp, R-Mich. When the talks are confined to low-key types, that’s usually a good sign that real work is getting done. Another positive sign is that the negotiators are keeping mum.

But you don’t need to wiretap the negotiators’ phone calls to know there are a limited number of options that can allow all sides to save face. The contours of a deal are there: a permanent extension of the middle class cuts, a one-year or two-year extension of the tax cuts for wealthier earners, and fiddling with other benefits like the Earned Income Tax Credit that aids lower-income workers.

Another option is just kicking the can down the road by a month or a year by keeping all rates the same. Both Republicans and Democrats might end with this kind of a deal, but they all recognize there’s a cost to that. Businesses are said to be sitting on some $2 trillion in cash, and uncertainty in the tax code isn’t going to help them spur investment—and that will affect families' budget planning.

Other elements of a deal have become clearer, too. On Thursday, the White House officials told reporters that it wanted a compromise to include a one-year, $140 billion package of tax cuts and aid for the poor and unemployed, including an extension of unemployment benefits that have been expiring in state after state. Republicans have insisted that any extensions be financed by offsetting budget cuts.

So the outline for a deal is there and eventually the negotiators will get there. No side wants to be responsible for already angry voters seeing a big income tax hike on January 1. The theater will come to an end. The procrastination will run its course and Americans will have the joy of new tax rates—at least until the next time Congress and the president go through this mess.

 

 

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