Obama’s “Decoupling” Proposal Is a Trap

The Obama Administration is now sending signals that it’s open to a temporary extension of all the Bush tax cuts. This is good news, as it means that the most economically beneficial parts of the cuts are now more likely to survive, at least for a time. However, the way the Administration wants to structure the extension is a trap that Republicans shouldn’t fall for.

Press reports say that the Administration wants to “decouple” the high-income tax cuts (broadly, cuts that only affect singles making more than $200,000 per year and families over $250,000) from the rest of the Bush tax cuts. They would extend most of the cuts permanently, and the high income cuts only for one or two years.

It’s easy to see where this is going. Republicans may be able to save the cuts for high earners this year by holding the rest of the tax extension package hostage: in order to secure extension of most of the tax cuts, President Obama must agree to extend them all. But if the cuts Obama wants are made permanent, Democrats will be able to block extension of the high-income cuts when they come up again in 2011 or 2012. Republicans should retain their bargaining chip by insisting that all the tax cuts be extended for the same period, whether that’s for one or two years or “permanently.”

Republican congressional leadership wants to extend all the tax cuts permanently, but has said it will agree to a two-year extension of all the cuts. This is the right approach. But if Obama proposes a one- or two-year extension of the high-income cuts and permanent extension of the rest, Republicans will be in the odd position of wanting less tax relief than the President; opposing him could pose a messaging challenge.

However, it also offers Republicans a chance to reclaim their position as the party of fiscal prudence. Obama has attacked Republicans for fiscal irresponsibility, frequently citing the $700 billion fiscal cost of extending the high-income tax cuts for ten years. But Obama’s plan isn’t fiscally responsible either—sunsetting the high-earner tax cuts only gets us about 10 or 15 percent of the way to fiscal sustainability. The tax cuts Obama wants to make permanent would grow the budget deficit by more than $3 trillion over the next decade. If making the high income tax cuts permanent is irresponsible, then making the rest of them permanent must be really irresponsible.

Republicans should say that we unfortunately can’t afford to commit to all the Bush tax cuts in perpetuity, and that the more responsible course is a wait-and-see approach: pushing them all out to 2012 or 2013 and then addressing the fiscal gap when the economy is stronger.

This would help defeat claims that Republican carping about the budget deficit is insincere. It would also put conservatives on better strategic footing going into the mid-decade fiscal adjustment: both because any rise in the top income tax rate would be off a 35 percent base, and because the looming threat of middle-class tax increases would make it easier to sell the entitlement cuts that make it possible to restrain the overall tax burden.

This piece originally appeared in National Review Online

This piece originally appeared in National Review Online