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Wednesday, August 1, 2012

Democrats Gain the Upper Hand in Tax Fight

It’s only been a year since Congressional Republicans, bent on cutting spending, manufactured a financial crisis by threatening not to raise the debt ceiling. Now, apparently thinking the public has forgotten that debacle, they’re furious that Democrats have figured out a way to turn the tables.

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Senator Patty Murray of Washington, a member of the Democratic leadership, said Monday that her party was prepared to let all the Bush-era tax cuts expire on Jan. 1 if Republicans refuse to raise taxes on the wealthy. The same holds true, she said, for the $1.2 trillion in automatic spending cuts that begin at the same time, which Republicans demanded in the debt crisis but now oppose after realizing that the cuts affect more than social welfare programs.

Republican leaders quickly voiced horror at these tactics. “Has it come to this?” said Speaker John Boehner, accusing Democrats of holding the economy hostage for the sake of high-end tax increases. Senator Mitch McConnell, the minority leader, called it “an entirely avoidable high-stakes game of chicken with the single-minded goal of taking more money from those who earn it.”

Taking hostages has unfortunately become the default method of exercising power in Washington, after Republicans decided that conventional compromise with Democrats was unpalatable. But the Democrats’ proposal would have nowhere near the same outcome as the Republicans’ debt ceiling threat last year.

Had Republicans forced the government into an unprecedented default last August, the worldwide impact on credit markets and economic growth would have been “catastrophic,” in the words of Ben Bernanke, the Fed chairman. By contrast, the combined impact of the tax-cut expiration and the spending cuts — the so-called fiscal cliff — would only push the economy into a shallow recession next year, he told a Senate panel Tuesday morning.

That would be a painful outcome for millions of people, but it is not comparable to a default, and would not happen instantly, instead building slowly over time.

It could also be prevented from happening altogether, as early as January, and Senator Murray has the right plan to do so. By letting all the tax cuts expire on schedule, Republicans can then join Democrats in restoring the cuts only for income up to $250,000. No vote need be taken on raising taxes for the rich, and thus Republicans won’t have to remove their no-tax-increase straitjacket.

She is right in refusing Republican demands to end the half of the sequester that cuts $500 billion from defense over a decade, the only leverage Democrats have in preventing much bigger and more painful domestic cuts. If Republicans want to limit the recessionary impact of the sequester they initiated and supported, they will have to reduce it in a balanced way, now that Democrats have learned a painful lesson from Republican power games.


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