Democrats are in a corner on the tax-cut debate, and they know it. If
they follow President Obama’s plan and allow tax relief for the top
earners to expire, they get blamed for the “biggest tax hike in American
history.” But if they extend more than $3 trillion in tax cuts, most of
them originally voted against in 2001, they get blamed for the biggest
deficit in history. Sounds like fun.
With the fragile economic recovery now on pause, Democrats know the trend lines won’t be heading in a positive direction any time soon, certainly not in time for the midterm elections. To change the subject, Democrats are pivoting to a message of Republican hypocrisy — while opposing benefits for the unemployed and tax relief to small businesses over deficit concerns, the GOP is happy to sink another $1 trillion into the deficit hole for tax cuts for the top 2 percent of America’s wealthiest workers.
{mosads}In their supply-side tangle with the GOP over the influence of tax relief on the economy, Democrats are divided, but House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Tim Geithner have both indicated that anyone making more than $250,000 a year will see his or her taxes rise. Republicans and Democrats are now arguing over the extent to which small businesses, which often file taxes as individuals, will be hurt by sunsetting tax relief for the top two tax brackets. Republicans are sounding the alarm as Democrats claim the impact will be negligible.
Depending where you do your research, there is loads of data to back up each party’s claim. Do you trust the liberal Center on Budget and Policy Priorities, which says that 8.9 percent or fewer of earners with small-business income make more than $250,000, or the congressional Joint Tax Committee, which found that half of all small-business income would be affected by the sunsetting of the Bush tax cuts for the top bracket? Wait, what about the Brookings Institution, which found that less 2 two percent of returns reporting small-business income are reported by taxpayers in the top brackets? But the National Federation of Independent Business insists businesses hit by the tax hike employ one-quarter of the workforce, while the National Association of Manufacturers found 68 percent of manufacturers file as individuals and had taxable incomes of more than $250,000.
Economists continue dueling on the subject. Arthur Laffer wrote this week in The Wall Street Journal that the richest workers, should they have their taxes raised, are the most capable of altering their level of taxation through lawyers and accountants and that ultimately, new taxes on the wealthy won’t lead to increased revenue for the government, but to increased deficits. Such taxes will lead to less employment and output as well, and therefore require more government spending, in what he called a catch-22. Liberal economist Robert Reich, on the other hand, argues that the wealthy already save a large portion of what they earn and spend what they want to spend.
President Obama and House Minority Leader John Boehner (R-Ohio) had such a data faceoff in a White House meeting last week. Ladies and gentlemen, draw your study and prepare for battle — no one knows which argument will win. Democrats can make the case that after Republicans enacted tax cuts they went on to continue spending, grow government and, under President George W. Bush, see the worst job-creation record in the history of its measurement. They can question Republicans’ commitment to solving the fiscal crisis. Yet, at the end of the day, Republicans will charge that Democrats want to raise taxes in a terrible economy and risk further hindering small-business hiring. And that doesn’t sound like an argument they can win.
Stoddard is an associate editor of The Hill.