To predictable cheers for bipartisanship, President Barack Obama said he will work with Republicans to extend at least a portion of George W. Bush's tax cuts before they expire at the end of this year.
If he wants to help both his presidency and the country, he should drop that idea.
Negotiations would likely go down one of two roads in this lame-duck congressional session. The Democratic president and resurgent Republicans could agree to extend all of the tax cuts for two years. Or Obama could stand firm on decoupling tax cuts for the wealthiest Americans, extending only the middle-class tax cuts for several years while giving the top rates at most one more year before allowing them to expire.
Republicans I spoke with last week are bracing for the latter path and another knock-down, drag-out fight. Obama should surprise them with another direction entirely: declare Bush tax cuts, like the Bush administration itself, over.
Obama should announce that he will work early in 2011 with Republicans, newly empowered in the House, to pass broad tax legislation retroactive to Jan. 1. He could assure markets that key issues such as the expiring dividend and capital-gains taxes will be addressed, and that bipartisan, permanent change would be for the better--the kind of policy that eliminates uncertainty and sets the country on the right path.
Rarely has a new conversation been so needed. Isn't it time we stopped fighting over Bush's tax policy? Wouldn't it be refreshing to have a fiscal-policy debate without repeating Bush's name?
In the long history of tax policy, there have been few issues more divisive than the Bush cuts. Since they passed, Democratic presidential candidates have called for their repeal, Republican candidates for their extension--even John McCain, the 2008 nominee, who had voted against them in 2001 and 2003. The Bush tax cuts are the black hole that swallowed the fiscal-policy debate.
And they weren't even worth all the partisan wailing. Dropping the top marginal rate to 35 percent from 39.6 percent didn't destroy civilization, as some Democrats would have you believe, or constitute real tax reform, as Republicans have urged for decades.
The fact is, if we extend the Bush tax cuts, it locks in the status quo. Earth to Washington: The status quo stinks. With the economy still limping forward, much more significant fiscal-policy medicine is in order.
The tax overhaul we need would address the fact that after Japan reduces its corporate tax rate next year, a move that is almost certain to happen, the U.S. will have the highest corporate tax rate in the world. Lowering the top federal rate on corporations to 25 percent, from the current 35 percent, would largely pay for itself in business activity that's stimulated or not lost to Asia.
A proper overhaul also would address the fact that special giveaways have bloomed like algae in the Mississippi Delta, narrowing the tax base and driving up marginal rates. A broadened tax base--one that caps the deduction for state and local taxes paid, for instance--could allow rates to be reduced, perhaps even with increased revenue.
These and other significant--not to mention difficult--tax changes are under consideration by the bipartisan commission that Obama created eight months ago to recommend ways to reduce annual budget deficits. Unless the 18-member commission can assemble a 14-vote supermajority for a plan to be voted on by Congress, the best it can do is produce a set of recommendations to guide policy makers. What better way to start the great tax rewrite of 2011?
According to a paper by Vincent and Carmen Reinhart, countries recovering from a financial crisis typically see slower growth and higher unemployment for a decade. The right tax changes could offset our lingering hangover and offer hope that growth over the next decade will be on par with what Americans are used to.
If Obama enacts major tax changes with Republicans, he will have delivered legitimate change and set himself up to be reelected in 2012. Congressional Republicans can lock in their political gains by showing voters that they can govern effectively. They might even produce something we have not seen in a very long time: a popular speaker of the House of Representatives.
There's so much we can accomplish, if only we begin by forgetting about the Bush tax cuts.
Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.