The Real Budget Solution

The real budget solution, says EJ Dionne, is to let all the Bush tax cuts expire at the end of 2012. He pays generous tribute to Jonathan Chait of The New Republic, who was first to suggest this clever plan to save the economy. As Dionne says,

Nothing is more annoying to a columnist than another columnist who gets to an idea you had planned to write about before you do. And with that, I salute The New Republic's Jonathan Chait for his excellent column in the current issue of the magazine...

[T]he Clinton tax rates should provide the baseline for all discussions of the debt and the deficit. And even though Jonathan got to this issue before I did, that won't stop me from coming back to it, because this is where the deficit debate needs to start. The real test of a deficit hawk's credentials should be: Are you willing to let the Bush tax cuts expire or not?

Can he really think that Chait is the first to come up with this? For a start, it's the letter of current policy. Here's a new idea: call me crazy, but let's do what we're already doing. Unfair, you might say: up to now, nobody has actually advocated leaving current law in place. Not so. The idea of reversing all the Bush tax cuts after a temporary extension has been in the air for ages.

Martin Feldstein suggested it in the Wall Street Journal last May: Extend the Bush Tax cuts--For Now. (I mentioned the article approvingly in a subsequent blog post and column.) Last September, in an NYT column that attracted a lot of attention, Peter Orszag made the same argument:

The beauty of extending the tax cuts for only two years is that canceling them doesn't require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020...

Let's continue the tax cuts for two years but end them for good in 2013.

(Great column, I said, I agree with every word.)

Restoring the Clinton tax rates is certainly not the best way to close the deficit, even if you think raising revenue should be a big part of the solution (as I do). A base-broadening tax reform of the sort proposed by Bowles-Simpson would be much better from an economic point of view. It would also be easier from a political point of view, because simply letting all the Bush tax cuts expire would unambiguously break one of Obama's 2008 promises (whereas raising more revenue from a broader base would only kind of break it). It's ridiculous to think, as Chait and Dionne both seem to, that Obama will be able to campaign in 2012 without committing himself one way or the other on this. If a tax reform hasn't already been done by then, would he be willing to campaign on the pledge to let all the Bush tax cuts expire? If I were him, I'd far rather defend a bipartisan tax reform just accomplished than run on a promise to raise everybody's tax rates.

Nonetheless, if the choice at the end of 2012 is between (a) keeping taxes as they are or (b) breaking a promise and restoring the Clinton rates, then (b) is the better plan. Congratulations to Chait and Dionne for coming up with it.