Tax Policy

Is Ending the Top-Bracket Bush Tax Cuts a Winning Issue for Democrats?


Is Ending the Top-Bracket Bush Tax Cuts a Winning Issue for Democrats?

Photograph by Chip Somodevilla/Getty Images

Politicians are sensitive indicators of the public’s changing moods. They have to be. So it’s revealing that now, suddenly, Democrats are talking up the idea of ending the Bush tax cuts for the highest earners. After several years of being rocked back on their heels by the Tea Party, Democrats led by Senator Charles Schumer of New York want to start debating the tax cuts now, even though they don’t expire until Dec. 31.

Is this a winning issue for the Dems? On the whole, probably yes. True, Republican presidential candidates say that any attempt to end cuts for the highest earners, while continuing them for others, represents class warfare. But that argument doesn’t seem to pack the punch it did even a year ago. The Tea Party’s image was tarnished by last year’s fight over the debt ceiling, in which Tea Partiers in the House brought the federal government to within hours of default by refusing to compromise to achieve a long-term budget deal. Plus, the slow recovery has fueled anger over income inequality—the public’s sympathy for the rich has eroded significantly.

“The landscape has completely shifted,” Representative Steve Israel, another New York Democrat, told Bloomberg News in a March 1 interview. “Every time Republicans are defending tax cuts for millionaires and blocking tax cuts for the middle class, we win.”

Republicans’ counterstrategy is to portray themselves as defenders of small business. Senator John Thune of South Dakota told Bloomberg News that Republicans will argue that a tax increase for some high earners would wind up raising taxes for small businesses. The logic: Many owners of small companies report their business income on individual tax returns.

Two years ago, President Barack Obama broke a campaign promise to end the high-end Bush tax cuts. He didn’t want his party to be perceived as envious class warriors. But he got something from the Republicans in exchange: payroll tax cuts and an extension of unemployment insurance benefits. Those measures amounted to a big chunk of stimulus that kept the economic expansion alive.

The economic case for ending the top-bracket tax cuts is sound: The highest earners don’t spend very much of their tax cuts, so there’s little bang for the lost buck. And there are about $800 billion worth of lost bucks: Continuing the 2001 and 2003 tax cuts for everyone would cost $4.5 trillion over 10 years, while extending them only for individuals making less than $200,000 a year and married couples making less than $250,000 would cost $3.7 trillion.

There is, however, one drawback for Obama’s party. In the quid pro quo world of Washington, if the Democrats don’t give Republicans the high-end tax cut extension this time around, they won’t be able to ask for anything in return. So it’s possible that some of the economic stimulus favored by Democrats could be a casualty of the tax-cut battle.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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