Democrats should extend the Bush tax cuts
Promising the GOP four more years of Bush-era tax rates may be the key to successfully inking a deal on the debt ceiling
David Frum
David Frum

Here's one Democratic compromise that could move the debt ceiling talks further along: Extend the Bush tax cuts for four more years.

Arguably, the Bush tax rates may be the single most important deal-maker on the table.

Here's why:

Both parties, Democrats and Republicans, have agreed that now is the time to take action on the federal deficit. Personally, I don't happen to agree: I think the time to act will be when unemployment drops below 8%, or interest on federal bonds rises past 4%. But who listens to me?

Regardless, both parties agree: This is the time to shrink our ballooning deficit, as Washington tries to hammer out a deal to raise our $14 trillion debt limit, lest the federal government default on its debt in early August.

Doubts about 2012 lead to panic in 2011. Unless the GOP can lock in at least some of their preferences today, when they wield the leverage conferred by the debt-ceiling debate, they risk forfeiting everything in 2012.

It's pretty obvious how Barack Obama and the Democrats would like to resolve the problem: (1) Slow the growth of federal social programs, especially Medicare; (2) Cut defense spending; and (3) Allow the Bush tax cuts to lapse.

The convenient thing about this Democratic plan is that it does not require big changes in existing law. The president's health care reform law has already conferred on the administration many of the tools it would like to use to rein in Medicare. Defense spending will decline as the president ends combat operations in Iraq and Afghanistan. The Bush tax cuts are pre-programmed to lapse automatically at the end of 2012.

All Obama needs to do is win re-election in November 2012, and his way forward on the deficit becomes surprisingly smooth.

Republicans know that.

The preferred Republican path to deficit reduction is: (1) Enact big changes in federal social programs, especially Medicaid; and (2) Lower tax rates further, in hopes of accelerating growth and generating revenues.

Leave aside the economic merit of the GOP concept. Look at the political hurdles it faces: A Democratic Senate and president won't sign off on those initiatives, so this plan requires Republicans not only to win the presidency in 2012, but to make big gains in the Senate as well. Meanwhile, Republicans must worry that if they don't win big, they will lose the clout to keep the Bush tax rates in place.

And Republican insiders, surveying their rather lackluster presidential field, cannot feel much certitude that big wins are in store.

Doubts about 2012 lead to panic in 2011. Unless the GOP can lock in at least some of their preferences today, when they wield the leverage conferred by the debt-ceiling debate, they risk forfeiting everything in 2012.

One way to achieve a deal is for Obama to escalate, and show some real muscle. (He might say: "If I have to cut 44% out of the federal budget starting next month, I'll be guided by one simple rule: Pay Texas last.") That might pressure the GOP into accepting a deal.

Escalation, however, is not the Obama way. The alternative is to de-escalate, to remove the worst of the Republican fears of what might happen if they allow more borrowing in 2011 and then lose in 2012. He could say: "I'll extend the Bush tax cuts two years longer, postpone that problem till after the 2014 midterm elections. We mutually agree to lean more on Medicare for savings and less on Medicaid — Medicare being the plusher program, with more room to cut. We mutually agree to wind down the conflicts in Iraq and Afghanistan. We postpone more dramatic action until we see how strongly federal revenues recover as the economy returns to normal. And one more thing: We get rid of the debt ceiling altogether, so we put an end to these ridiculous crises. Let's both agree that when Congress votes for a certain amount of spending, and votes for a lesser amount of taxing, it has for all practical purposes already voted to authorize the executive to borrow the difference. No other country on earth has this ridiculous debt limit thing. It's an outdated artifact of the First World War. And like those forgotten First World War ammo dumps still sometimes found in suburban Washington, D.C. neighborhoods, this artifact might someday blow up and hurt somebody."



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