Dollars, Taxes

That is what the current debate in DC is all about really. No, not the city with a team that has a star on their heads, the conflict between dollars owed as part of the National Debt and the concept of maintaining tax cuts put into place 10 years ago that expire at the end of this year. These "Bush tax Cuts" were passed through Reconciliation (attached to the budget which can't be filibustered, only voted up or down) and therefore have a 10 year expiration date. At the time, there were no budget cuts made to offset the tax cuts so they have added a nice chunk to the current National Debt.

Which is one reason why we are where we are today.

Our National Debt is at an all-time high and projected to continue growing. However, Congress is battling over whether to maintain tax breaks just for taxable income levels up to $250,000 or to extend them for all levels of taxable income. That is right, the measure passed by the House (with no Republican support) does provide the continuation of the Bush Tax Cuts for everyone. It just stops the benefits at a taxable income level of $250,000 for families ($200,000 for individuals). The plan passed in the house would increase the margin tax rate on dollars above the $250,000 level by 3-4%. So, 100% of all taxpayers get to keep a tax cut. For 98% of all taxpayers, they get the exact same amount of tax cuts as passed by the 2001 and 2003 Bush Tax Cuts. It is just the marginal taxable income above $250,000 for the highest earning 2% of the population that Congress is arguing about. It seems counter-intuitive that we can talk about suffocating debt throughout the Fall campaign season and then be willing to make it bigger just a month later, but that is where we are.

President Barack Obama campaigned on not raising taxes on those making less than $250,000 (in some conversations he said 95% of the American public). In fact, he has lowered taxes already for a little over 95% though the Making Work Pay tax credits of $400 for an individual and $800 per family in 2009 and 2010.

In some Democratic circles, there is the desire to call the Republicans bluff and make them filibuster for this extra tax cut for the top 2% of earners while holding tax cuts for the lower and middle class hostage. People harken back to when preisdent Bill Clinton called the bluff of Newt Gingrich and the Republican Congress on the budget and shut down the government. People became outraged and called their local congressman. A budget had to be passed at some point and Clinton was able to draw a line in the sand and stay there until Congress was forced to come back to him and accept his budget. The same cannot be said about the current Tax Cut situation. The Republicans would be quite OK with letting the tax cuts subside because they know that more harm would be done to Obama than to them. So Obama and the Dems do not have a strong bargaining position. I think the Dems could have played chicken with the Repubs if they had brought this bill to the floor much earlier in the year, but that luxury is gone.

The National Debt will still be a problem 2 years from now regardless of what bill does or doesn't get passed now, but the tax cuts are a big deal now. Also on the table are the continuation of extended unemployment benefits.

The sign of a good negotiator is one who realizes what they can't get, and uses that to maximize how much they get. At this point it is very likely that President Obama realizes his only choices are the temporary extension of all Bush Tax Cuts or none of them. He doesn't want the lower and middle class to be worse off, so he will settle on the 2 more years of tax cuts for taxable income above $250,000. The mark of how good a job he does in negotiating is to see what he gets in return. I assume there will be a 1 year extension of extended unemployment benefits, but it would be interesting if he is able to slip in anything else as well. Stay tuned.