Why Obama’s Tax Plan Is About More Than Ending Tax Cuts For The Wealthy

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President Obama’s renewed push to end Bush-era tax cuts for income over $250,000 a year has clarified the stakes of this November’s election. But if he gets his way, Obama’s plan could simultaneously allow the country to at least temporarily avoid the massive budget tightening set to occur automatically at the beginning of next year, which economists fear could lurch the country back into recession.

In January, across the board cuts to defense and domestic programs, totaling $1.2 trillion over 10 years, are set to kick in automatically. At about the same time, all of the Bush tax cuts are set to expire, along with the payroll tax holiday and other temporary measures.

The parties have been battling for months over how to avoid this so-called “fiscal cliff.” Republicans propose to extend all of the Bush tax cuts and replace the first year of meat-axe spending cuts — known technically as the “sequester” — with cuts to food stamps and other domestic programs. Democrats find this alternative unacceptable, but have used the threat of the fiscal cliff — and particularly the defense cuts — to push Republicans to abandon their anti-tax absolutism, and replace the fiscal cliff with a balanced deficit reduction plan.

So far, nobody’s budging. But if Democrats win the election, and the top bracket tax cuts expire, they can use the fresh revenue to pay for wiping the sequester off the books.At least temporarily.

If the Bush tax cuts for high earners lapse, CBO projects that would raise revenues by $800 billion over 10 years, relative to what they expect if all the cuts are extended indefinitely.

That’s not quite enough to offset the entire cost of nixing the sequester’s $1.2 trillion in savings. But it’s enough to delay it, and buy the next Congress time to pass the sort of deficit reduction program both parties claim to want.

Democrats aren’t explaining Obama’s plan this way. At least not yet.

“It’s all kind of a mix,” said Senate Majority Leader Harry Reid at his weekly Capitol briefing Tuesday.

Obama’s plan still faces blanket GOP opposition. Sen. Lindsey Graham (R-SC), one of the only Republicans who has entertained the idea of putting tax revenue on the table to avert looming defense cuts, is working on a Republican plan to delay the sequester in a much different way.

His spokesman did not return a request for comment on Obama’s plan.

Obama has proposed extending the rest of the Bush tax cuts for one year — to reset the clock for Congress to pass broader tax reform. If Obama wins in November and Congress delays the sequester by a year as well, the country would face a new, smaller fiscal cliff at the end of 2013. But this time around members of Congress would have election results to guide them.

ABOUT THE AUTHOR

Brian Beutler is TPM's senior congressional reporter. Since 2009, he's led coverage of health care reform, Wall Street reform, taxes, the GOP budget, the government shutdown fight and the debt limit fight. He can be reached at brian@talkingpointsmemo.com
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