Who Controls the Bush Tax Cut Debate?

In the Iraq War debate, Donald Rumsfeld once said there are known knowns (the things we know we know), known unknowns (the things we know we don't know) and unknown unknowns -- unforeseeable surprises. The war in Iraq under President Bush had all the three.

But in the war over the Bush tax cuts, there are no unknown unknown. The upcoming lame duck Congress debate doesn't have room for many unforeseeable surprises, a Treasury official told me, because the options are staring Congress dead in the face.

We know we know that 98 percent of families and small businesses should get a permanent tax extension, as they will under Democratic Sen. Max Baucus' plan. We know we don't know what will happen with the rest of the legislation. For the top two percent, there are only so many options. Democrats will try to let the "rich rates" expire after this year, or after a grace period of one or two years. Republicans, however, will try to extend them permanently.*

"Now the president's said that he's open to compromise," Treasury said. "There are a lot of different options, but most of them have been written about. You move the length of the extension, you break up the bill, and so forth. These have been hashed over internally, but we haven't coalesced over one strategy."

One foreseeable question -- a known unknown, if you will -- is how the president's promise to hear both sides will fit with his three-year old pledge to role back the Bush tax cuts for the wealthy. If the president knows what he wants, what's the good in pretended to be open to change? There is no indication that the White House is willing to tear a page off its calender without scheduling somebody's income tax rates to rise. There is also no indication that Republicans will budge.

That leaves the $3 trillion Bush tax cuts in the hands of the outgoing moderates, a motley crew of ousted Blue Dog Democrats in the House and retiring or rejected moderates in the Senate -- like Evan Bayh, Byron Dorgan and midterm casualty Blanche Lincoln. "There is a short window [for moderates] to stake out ground next week," the Treasury official said.

And so, it will be the conservative Democrats -- the group most victimized by the midterm shellacking -- controlling the debate over the Bush tax cuts. If Blue Dogs and Senate Democrats gravitate toward the party that just pulped them, Obama might have no choice but to acknowledge de facto Republican leadership a few months early by signing their full Bush tax cut extension. But if the moderates are itching to go out with a fight, the president might yet follow through on one of his oldest promises.

* FWIW (and this wasn't verified by Treasury) I think the most likely scenario is that the middle class rates are extended permanently and some upper class rates are extended temporarily, allowing all sides to claim partial victory. The White House would defend this capitulation under the banner of "balancing 2008 promises with 2010 economic realities."